Our strategy framework Our mission and vision are based on the three pillars of structure, manage and acquire. These are underpinned by trust and competence.
OTHer financial HigHligHTs £734m Operating companies’ cash generation £750m – £850m Operating companies’ cash generation in 2011 42p Dividend per share £2,104m Group MCEV
£67.5bn Assets under management £373m Group IFRS operating profit £1.0bn IGD capital surplus (estimated)
<50% Reduce gearing to below 50% by the end of 2011 £46m Asset management operating profit £2.8bn IGD Excess Capital (estimated)
As a consequence of this performance, I am pleased to report to shareholders that the Board has decided to recommend a final dividend for the year of 21p per share, making a total of 42p per share for the financial year. Shareholders may again elect to receive their dividends as scrip.
the simplification of our capital structure in 2010 and the subsequent achievement of the Premium listing on the lSE were significant steps forward for Phoenix and rightly attracted considerable attention. less publicised were our continuing investments in the development of our operating platform for the management of our closed life funds and the policies dependent on them. the Phoenix platform represents a unique proposition for the integration, structuring, de-risking and management of closed funds, presenting a rich source of future value for both policyholders and shareholders alike. We have identified a number of opportunities for further development, both in Phoenix life and IGNIS, which will be pursued in 2011.
Millions of individuals have a substantial portion of their savings invested in closed life funds. Running these off as individual funds creates an uncertain future of escalating administrative cHairman’s sTaTemenT
ron Sandler Chairman costs and diminishing expertise to look after these policies. this is why the Phoenix consolidation vision is so important to policyholders as well as to our shareholders. We are the only specialist participant in the uK market with the scale, expertise and low-cost operating platform that is capable of taking on large closed books of business and integrating them into a larger whole. In doing so, we can reduce costs and diversify risk. this enables us to invest in a broader range of asset classes with the aim of improving policyholder returns and releasing surplus capital to shareholders.
During the year, a search was initiated for a successor to Jonathan Moss as our Group Chief Executive Officer and I am delighted that this concluded in early February 2011 with the appointment of Clive Bannister to the role. Clive has spent sixteen years in a variety of senior roles at HSBC including his most recent position as a member of the Group Management Board and Global Managing Director of Insurance and Asset Management. He has a first class track record of success in growing businesses, and in developing and leading large teams. On behalf of the Board and all our colleagues at Phoenix, I was pleased to welcome Clive to the Group and I am very much looking forward to working with him. the Board was also pleased to welcome Jonathan yates, who joined the Board as Group Finance Director in June 2010.
Ron Sandler Chairman 03 Phoenix Group Holdings Annual Report and Accounts 2010
introduction I was proud and honoured to be offered the opportunity to become Group Chief Executive Officer in February this year. the Phoenix business model creates value by combining our closed life business in Phoenix life with the asset management capability of IGNIS. this combination delivers a unique and unrivalled potential to play a key role in the decommissioning of the closed life sector. Phoenix life companies generate cash flows for Group and investment funds for IGNIS, who both manage and leverage the scale of the life company assets to attract talent and produce performance that can also win third party business. this is a blueprint that offers rewards for our shareholders, our customers and the policyholders of other closed life funds that we may seek to integrate into our existing business in the future.
Working for Phoenix is an exciting challenge, because it is a business that does something of real importance for millions of customers, who are always at the heart of our work.
All of the above is being achieved in a culture that is both risk sensitive and alert. the Group is self-evidently actively managing its risk across all aspects of the business. the Group has invested heavily in people, processes and systems ensuring that the consideration of and management of risk is at the forefront of all that we do. this protects our policyholders and other Group stakeholders from unexpected negative outcomes. We will be relentless in managing risk going forward.
IFRS operating profit was £373 million, including a £46 million contribution from IGNIS, against 2009’s pro forma £457 million. the 2009 IFRS operating profit benefited from significant positive longevity assumption changes.
Our year end MCEV was up 15 percent to £2,104 million. We achieved incremental MCEV from value enhancing management actions of £296 million, which was in excess of our target of £145 million.
Our estimated IGD surplus was £1.0 billion at 31 December 2010, with headroom of £0.1 billion over our new IGD capital policy. Following the transfer of the business of Phoenix & london Assurance limited to Phoenix life limited, the headroom increased to £0.2 billion. We have identified additional actions that will improve this surplus further. We hold an additional £1.8 billion of excess policyholder and shareholder capital within Phoenix life Holdings limited, which is also available to the Group, making total capital available to the Group £2.8 billion at the end of 2010 (2009: £3.1 billion).
Phoenix Group has taken major strides forward in 2010. We set a clear focus on the most important tasks – and we delivered on them all. We have proved that the Phoenix business model works.
We have received approval to enter into the pre-application process for the use of our internal model under Solvency II. Furthermore, our actuarial systems transformation project is well underway and on track to deliver a single actuarial platform to replace the numerous legacy systems that are currently in use. It will also provide us with real time reporting of our solvency position.
We have continued to develop our outsourced service model. Our largest outsourced service partner, Diligenta, has successfully introduced the BaNCS policy administration platform and has already transferred over 1.6 million live policies and 2.5 million non-live policies onto BaNCS from a variety of outdated and expensive legacy systems. It is vital for the sustainability of our model and the profitability of our partners that we continue to complete these transformations across our book of business.
iGNiS highlights IGNIS Asset Management, led by Chief Executive Officer, Chris Samuel, was able to grow assets under management from £66.9 billion to £67.5 billion despite the run-off characteristics of the life company assets. this was made possible by a very strong £1.3 billion of net third party sales as well as investment growth. IGNIS also delivered £46 million of IFRS operating profit in 2010, 35 percent higher than the £34 million pro forma number for 2009.
the IGNIS executive team has been considerably strengthened with the hires of tim Roberts as Chief Operating Officer, Chris Fellingham as Chief Investment Officer, Mark lovett as Chief Investment Officer – Equities and Michiel timmerman as Managing Director of IGNIS Advisers. this brings together the multi-manager and fund of funds capacities in hedge funds, real estate, private equity and retail into a single team.
Simplification of our banking arrangements We will continue to explore options with our lenders regarding the best structure and timing for the restructuring of our banking facilities, with a view to changing some of the current covenant constraints. However, our present facilities feature favourable interest margins and we will only agree to new arrangements if an opportunity arises that we consider to be in the best interests of our shareholders.
In parallel, we are setting a new target for gearing of below 50% by the end of 2011.
economic and industry overview Financial markets have continued to be volatile and global economic growth has been patchy. Phoenix Group has refined its approach to risk appetite and risk management over the course of the year. We have modelled our solvency and cash flows under a range of testing stress scenarios and we are confident in our ability to meet our commitments.
the Phoenix business model, combining the strength of our life companies with our asset management capacity in IGNIS, is a powerful driver of value for our customers and our shareholders.
IGNIS IFRS operating profit increased by 35 percent to £46 million (2009 pro forma: £34 million)
Operational Achieved a Premium Listing on the london Stock Exchange and FtSE 250 Index inclusion restructured Tier 1 Bonds and settled all outstanding issues with bondholders £33 million share issue to settle 2009 tier 1 Bond Coupon received approval to enter into the pre-application process for the use of an internal model for Solvency II
Successful migration of over 4 million policies from legacy systems onto a modern, purpose-built administration platform
Customer complaint volumes down by 24 percent on 2009 exceeded industry benchmark for open market option transfer payment processing
Business and sTraTegy 10 Phoenix Group Holdings Annual Report and Accounts 2010
We operate in two complementary market sectors: life assurance and asset management. Whilst these sectors continue to face numerous challenges driven by a combination of market volatility, regulatory change and shifts in customer product choice, we believe they present significant opportunities in the future on which we are uniquely positioned to capitalise.
Within our life business we have an array of skills and experience in the management of closed funds which we are able to apply to generate value for customers and shareholders which others would not be able to achieve.
Central to our proposition is listening to our policyholders. Millions of customers depend on Phoenix to manage their funds effectively and communicate clearly and honestly with them in a timely fashion. to ensure we honour this trust, in 2009 we created a wide-ranging programme of customer research enabling us to solicit and respond to policyholders’ views. Our rolling programme of telephone and face-to-face surveys by independent research companies ensures we are in touch with customer wants and needs. the findings help us continually to refine our customer proposition.
In order to manage the life businesses efficiently while the policies are in run-off, we aim to minimise the fixed cost element of our operations. this ensures that the Group does not become exposed to high fixed costs in relation to the volume of policies under management.
Our management services team is charged with all sourcing strategies including putting in place arrangements for third party policy administration and maintaining oversight of their performance. Financial and risk management are core skills which are retained in-house.
IGNIS Asset Management manages the funds that back the investments of our policyholders and promotes product propositions that are appropriate to third party clients in the institutional, retail and international markets.
We have further simplified our outsourcing arrangements in 2010, successfully arranging for the transfer of our uISl business to our existing partner, Diligenta.
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 and treasury, Group tax, Corporate Development and Corporate Finance, Group Risk, legal Services, HR, Corporate Communications, Strategy and Planning, Investor Relations, Company Secretariat and Internal Audit.
the Group functions have 183 employees, of whom 101 provide services directly to Phoenix life.
Our latest transfer of business (PAlAl to Pll) was implemented to take effect from 1 January 2011.
Phoenix life has 580 employees mainly centred at the Group’s Wythall office near Birmingham.
iGNiS asset Management IGNIS Asset Management is the Group’s asset management business and is led by its Chief Executive, Chris Samuel. It provides 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 top 15 fund managers in the uK, IGNIS is responsible for £67.5 billion of assets, including £60 billion of assets for the Group’s life companies.
With offices in london and Glasgow, and over 500 employees, IGNIS has investment capabilities across multiple asset classes organised into six investment business units: – Fixed Income – Equities – Advisors – offering Fund of Funds products – Real Estate – Solutions – offering asset/liability and risk services – Joint ventures and partnerships.
throughout 2010 teams from across IGNIS have been working together to develop its strategy for the next round of growth. the aim is clear: to develop IGNIS into a leading asset management business that delivers strong investment performance and high quality service to both Phoenix life and third party clients.
IGNIS has continued to develop its capabilities in 2010 with the successful attraction of a number of senior management and investment individuals.
Clive Bannister Group Chief Executive Officer and Director of PlHl – lead and direct the Group’s businesses in the delivery of the Group strategy and business plan. – Safeguard returns for policyholders and grow shareholder value. – Embed a risk-sensitive Group culture which recognises our policyholder obligations in terms of service and security. – Manage the Group’s key external stakeholders.
Jonathan yates Group Finance Director and Director of PlHl – Develop and deliver the Group’s financial business plan in line with the strategy. – Ensure that the Group’s finances and capital are managed and controlled. – Ensure that the Group has effective processes in place to ensure all reporting obligations are met. – Assist the Group Chief Executive Officer in managing the Group’s key external stakeholders. – Maximise shareholder value though clear, rigorous and innovative assessment of business opportunities.
Mike Merrick Chief Executive Officer, Phoenix life – lead the development and delivery of the Phoenix life business strategy, including the continued integration of life businesses. – Ensure the optimisation of outcomes for customers in terms of both value and security. – Ensure Phoenix life deploys capital efficiently and effectively, with due regard to regulatory requirements.
– Oversee and manage the Group’s relationship with the FSA. – Support the Group Board Risk Committee in the oversight of the Group’s risk framework in line with risk strategy and appetite.
the size of our Group means we are able to maximise economies of scale and capital efficiencies. We also have a keen focus on operational excellence and embedding enduring operational improvements.
Mission to improve performance for policyholders and investors and deliver value for shareholders vision to be recognised as ‘the industry solution’ for the safe, innovative and profitable decommissioning of closed life funds in the uK with a specialised asset manager alongside
How we do it – Create a stable, robust and simplified business. – Actively manage our debt. – Create efficient capital structures.
– Completed QIS 5 and obtained approval from the FSA to enter the pre-application process for the use of an internal model for Solvency II.
– Completed the transfer of Axial to IGNIS. – Restructured tier 1 bonds and settled all outstanding issues with bondholders.
What we actually did – Achieved cash flow generation of £734 million. – Delivered £296 million of EV enhancement through management actions.
– Arranged transfer of business from one outsource provider (uISl) to another (Diligenta).
– transferred £37 billion of assets into new IGNIS performance fee structures.
How we do it – Stay well positioned in the market. – Have the right skills in place. – Make robust selection and execution decisions.
How we do it – Develop customer trust by delivering against commitments. – Maintain strong relationships with regulators and media. – Demonstrate we are a sound long-term investment.
What we actually did – Opened dialogue with a number of key potential vendors.
What we actually did – Revised our customer proposition following customer research in order to strengthen performance in key areas.
– Drove down complaint volumes by 24 percent on 2009. – Developed first alternative low value product solution and scheduled implementation for Q2 2011.
– Increased distributable estate by over £50 million in 2010. – Fully established PGH board membership and supporting committees.
– Developed and launched new Phoenix Group brand. – Increased analyst coverage and sales force engagement driving growth in share trading volumes.
– Developed with-profits strategy for implementation in 2011/12. – Outperformed industry 14 day target for Origo Open Market Option transfers.
What we plan to do next – Continue to develop our business readiness to acquire and integrate new funds in the future.
What we said we would do in 2010 – Implement initiatives to enhance customer experience. – Develop alternative solutions for low value products. – Pursue management actions to enhance distributable with-profits fund estate.
– Develop with-profits fund restructure strategy. – Further strengthen corporate governance arrangements. – Develop Phoenix Group brand awareness. – Strengthen Investor Relations capability to increase market, industry and media engagement.
What we plan to do next – Improve speed of payments across all claims and enhance complaint handling processes.
– Implemented employee engagement measurement in IGNIS. – launched a leadership development website and high impact training courses.
– Agreed and implemented Group succession planning process including regular reviews at senior level.
– Successfully attracted a number of high calibre people to senior appointments across the Group.
– Ran a Group-wide programme focused on embedding our values. – Maintained progress in the Group’s Corporate Responsibility programme.
What we plan to do next – Maintain high employee engagement. – Achieve employee retention above sector benchmark for each business unit.
It is vital to our continuing success that our people understand our vision for the Company, enjoy their work and are keen to share in our future. Our 2010 Employee Engagement Survey showed we continue to outperform our peers across all key employee engagement metrics. the Survey demonstrated that we are now within touching distance of achieving ‘best in class’ levels of engagement: our overall score of 77 percent is 7 percent above the Financial Services benchmark and 17 percent above the results achieved in 2009.
Attracting a broader shareholder base the closure of one site and transfer of work to another can be a traumatic experience, for both business and employees. Following the successful closure of the life Company Glasgow office early in 2010, our most recent challenge has been to close the Peterborough site and to ensure that all 2010 life Company year-end work could be carried out from Wythall (Birmingham). the project, which incorporated a gradual process to facilitate knowledge transfer and systems integration, was completed ahead of budget and plan.
the high level of support minimised the impact on the morale of the remaining employees, resulting in a 79 percent engagement score at the Peterborough site in November 2010.
Continuity through times of change the year saw the beginning of an important change to our shareholder base, as the Group achieved a Premium listing on the london Stock Exchange and was included in the FtSE 250 Index. this led to a dramatic increase in liquidity, which rose from an average daily volume of c.17,000 to c.200,000. Historically, a significant proportion of our shareholders have been uS-based and the liquidity of our shares on Euronext had been low. Now, with a Premium listing on the london Stock Exchange, we are attracting a broader shareholder base.
During the year, we established a formal Investor Relations function capable of responding to the needs of our shareholders, and developed a full Investor Relations programme consistent with a group of our scale. As well as a broader shareholder base, it is pleasing that analyst coverage of the Phoenix Group has increased, and this is reflective of our greatly expanded City profile. We are very excited about continuing this journey in 2011 and beyond.
Furthermore, customers can now leave comments about their interactions with us. this feedback is reviewed regularly and is an important driver in the continuing commitment to improving our processes.
the Euro Fund also grew significantly, ending the year as the top-performing fund.
In a leading-edge move within the uK life assurance industry, pension policyholders with guaranteed annuity rates in Phoenix and london Assurance limited (PAlAl) were offered the opportunity to increase their potential return. they were given the chance to convert their policies by releasing their guarantees in exchange for an immediate enhancement to their fund value and changes to the investment mix to include a significant exposure to investments with potentially higher returns.
Cash generation is a key measure of the Group’s performance. The cash generation section sets out an analysis of the operating companies’ cash generation, a measure of cash and cash equivalents remitted by the Group’s operating subsidiaries to the Holding Companies, and the Holding Companies’ cash outflows.
Holdings from 28 August 2009, the date of acquisition for IFRS purposes.
To assist users and give shareholders a basis for comparison, the Directors have provided additional comparative financial information on a pro forma basis. This information includes for the year ended 31 December 2009 the Pearl businesses from 1 January 2009 to 27 August 2009 in addition to the consolidated results of Phoenix Group Holdings from 1 January 2009 to 31 December 2009. Pro forma information therefore includes a full year’s results for the Pearl businesses.
Definition and calculation: Operating companies’ cash generation is a measure of cash and cash equivalents remitted by the Group’s operating subsidiaries to the Holding Companies and is available to cover dividends, debt servicing and repayments and other operating expenses.
The Board considers that MCEV provides the most relevant and consistent means of assessing the Group’s ability to enhance value: analysis: The Group continues to focus on the operating performance of its underlying businesses. Value enhancing management actions in 2010 delivered an incremental uplift in embedded value of £296 million against a target of £145 million. Management actions include the restructuring of a £1.2 billion portfolio of corporate loans leading to a reduction in asset volatility and an MCEV uplift of £139 million. This restructuring exemplifies one aspect of ‘The Phoenix way’ of developing innovative approaches to enhancing shareholder value.
Definition and calculation: Note 1 of the MCEV supplementary information sets out the basis of calculation of the Group MCEV.
Quantified target: The Group’s target is a £100 million per annum contribution to MCEV from management actions to 2014.
Definition and calculation: Note 5 of the IFRS financial statements sets out the basis of calculation of IFRS operating profit.
Definition and calculation: The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest EEA level insurance group holding company, which is Phoenix Life Holdings Limited (‘PLHL‘), a subsidiary of Phoenix Group Holdings. IGD surplus is defined as group capital resources less the group capital resource requirement.
analysis: The decrease in the IGD Excess Capital from 2009 reflects the payment of dividends, pension contributions and debt servicing and repayment costs partially offset by the strong performance of the with-profit and non-profit funds.
The IGD Excess Capital coverage percentage was 170% at 31 December 2010 (2009: 191%).
IGNIS delivered a strong IFRS operating profit of £46 million, up 35 percent from 2009. The results benefited from improving markets as well as increased performance fees following revised fee arrangements with Phoenix Life. These new fee arrangements have been externally benchmarked and better align IGNIS’ fee structure with Phoenix Life’s objective of superior investment returns, thereby rewarding IGNIS for performance above the benchmark.
analysis: The reduction in gearing reflects the prepayment of £122 million of debt in 2010 and the increase in the MCEV.
Target: The Group is targeting a reduction in the gearing ratio to below 50% by the end of 2011.
For the IGNIS Asset Management segment, assets under management are a key driver of revenues: analysis: Total assets under management were stable, increasing by £0.6 billion to £67.5 billion2. The increase was driven by positive market movements and net third party sales which offset the run-off of the closed life book.
3 Net shareholder debt is defined as shareholder debt (including hybrid debt) less Holding Company cash as set out on page 44.
3 Amounts received by Holding Companies in respect of Group relief are included within cash receipts from the relevant subsidiaries.
Operating companies’ cash generation Phoenix Life remitted cash and cash equivalents of £708 million (2009 pro forma: £695 million) from its opening free surplus and current year surplus emergence and capital releases. This strong cash generation coupled with higher cash flows from IGNIS Asset Management of £26 million (2009 pro forma: £21 million) exceeded the Group’s 2010 cash generation target of £625 to £725 million.
Included in valuation differences and other is a benefit of £125 million from the value of liquidity premiums expected to be earned following the restructuring of a portfolio of corporate bonds. These liquidity premiums are not recognised under IFRS.
Target cash flows The Group is targeting operating companies’ cash generation of £3.2 billion for the period from 2011 to 2016: Sources of future cash flows £bn
Emergence of surplus1 1.5 Release of capital1 1.4 Recurring cash receipts generated by life companies 2.9 Other2 0.3 Operating companies’ cash generation 3.2 1 Includes cash flows from management actions. 2 Includes cash flows from IGNIS and management services.
£750 million to £850 million of these cash flows are expected to be generated in 2011.
The resilience of the cash generation target is demonstrated by the following stress testing: Stress testing £bn
The Group generated MCEV operating earnings after tax of £543 million in 2010, an increase of £156 million on the 2009 pro forma period (on a consistent basis).
Group MCEV operating earnings before tax 754 374 164 538 Tax on operating earnings (211) (105) (46) (151) Group MCEV operating earnings after tax 543 269 118 387 2 Life MCEV operating earnings are derived on an after tax basis. For presentational purposes Life MCEV operating earnings before tax has been calculated by grossing up the after tax Life MCEV operating earnings. Life MCEV operating earnings before tax of £758 million (2009 pro forma: £380 million) is therefore calculated as £546 million operating earnings (2009 pro forma: £273 million) grossed up for tax at 28 percent (2009 pro forma: 28 percent).
Experience variances 264 62 Other operating variances (5) 21 Assumption changes (38) 73
Favourable assumption changes in 2009 largely related to the harmonisation of longevity assumptions across the Group and the results of an annuitant survival investigation.
IGNIS Asset Management IGNIS performed well in 2010 with operating profit increasing 35 percent to £46 million (2009 pro forma: £34 million). The higher operating profits reflect stronger markets and higher performance fees following revised fee arrangements with Phoenix Life.
Third party1 29 29 Life fund revenue2 115 82 Total revenues3 144 111 Staff costs (59) (49) Other operating expenses (39) (28) Total expenses (98) (77) IGNIS Asset Management operating profit before tax 46 34 1 Includes performance fees of nil (2009 pro forma: £3 million). 2 Includes performance fees of £35 million (2009 pro forma: £1 million).
The new fee arrangements with Phoenix Life have been externally benchmarked and better align the fee structure with Phoenix Life’s objective of superior investment returns, thereby rewarding IGNIS for performance above the benchmark. Strong investment performance supports policyholder persistency in Phoenix Life and improves cash generation. Looking forward, the new fee arrangements will potentially bring greater variability to IGNIS’ operating profit as the base fees have been reduced in exchange for the potential for greater performance fees.
2 Group pension assets managed by IGNIS are included in third party assets under management. Third party assets under management at 31 December 2010 include £1.0 billion of assets in respect of the HEXAM partnership which are due to transfer from IGNIS administration in the first half of 2011.
3 Including stock lending collateral assets under management were £76.7 billion. Collateral assets of £9.2 billion now managed by IGNIS includes £6.4 billion from a new stock lending programme in Phoenix Life as well as a transfer from a third party manager of £2.8 billion of collateral assets during the period.
The increase in staff costs has been mainly driven by the increased cost of and investment in Corporate and Investment Management resources.
Assets under management increased by £0.6 billion to £67.5 billion at 31 December 2010, as shown above3.
Internal funds under management decreased by £0.1 billion to £60.0 billion in the year as positive market movements of £5.3 billion almost fully offset the run-off of the closed life business of £5.4 billion.
reconciliation of Group mceV operating earnings to Group mceV earnings Group MCEV earnings are reconciled to the Group MCEV operating earnings, as follows: Year ended
Adjustment to move to a longer term rate of return4 £m year ended
Th ird pa rt y Li fe c om pa ni es
Th ird pa rt y Li fe c om pa ni es 36 Phoenix Group Holdings Annual Report and Accounts 2010
Economic variances on non‑covered business 2010 was impacted by an increase in the market value of the listed Tier 1 Bonds which reduced MCEV earnings by £40 million before tax (2009 pro forma: £169 million).
Gain on debt refinancing As part of their acquisition by Phoenix Group Holdings, the Pearl businesses refinanced their external borrowings in 2009 resulting in an overall net reduction of £491 million. In addition, the remainder of the £2.9 billion of this external debt was also restructured and the terms amended.
Debt finance costs1 102 176 Debt issue costs – 202 Tier 1 coupon 66 – Other finance costs – 12 Finance costs attributable to owners 168 390 1 Finance costs in respect of the Impala and Pearl facility agreements (and associated swap interest) and the Royal London Payments in Kind (’PIK’) notes and facility.
Debt finance costs reduced by 42 percent on the pro forma comparative period as a result of the above mentioned restructuring and lower interest rates.
Group mceV The Group MCEV increased by £277 million over the year to £2,104 million at 31 December 2010 as shown below. The increase was mainly due to MCEV earnings generated in the year of £255 million.
Group MCEV at 1 January 1,827 1,044 Group MCEV earnings after tax 255 551 Other comprehensive income Actuarial gains/(losses) on defined benefit pension scheme 27 (14) Exchange differences on translating foreign operations – (44)
Phoenix Life 388 469 IGNIS Asset Management 46 34 Group costs (61) (46) Operating profit before tax1 373 457 1 Operating profit is presented before adjusting items.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
The owners’ one-ninth share of the policyholder with-profit bonus of £55 million increased by 12 percent on the result for the comparative pro forma period of £49 million as bonus rates improved following better market conditions.
The longer term return on owners’ funds for 2010 of £42 million reflects the asset mix of owners’ funds: primarily cash based assets and fixed interest securities. The return has decreased from the comparative pro forma period due to lower returns on cash given the continuing low interest rate environment. Returns on cash are not normalised.
The operating profit for management services of £20 million (2009 pro forma: £14 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.
IGNIS Asset Management Operating profit of the asset management business increased from the pro forma comparative period by 35 percent to £46 million. The results benefited from stronger markets and higher performance fees from the life companies. Further information on the results of IGNIS Asset Management is included in the Group performance – MCEV section.
Group costs Costs relating to Group functions amounted to £40 million before tax (2009 pro forma: £20 million), the balance of the charge in both periods relates primarily to the pension schemes. The increase in Group costs reflects the ongoing costs from having a Premium Listing and the reallocation of certain functional costs from operating companies to Group.
Investment return variances and economic assumption changes on long‑term business Overall, the Phoenix Life business had favourable investment return variances and economic assumption changes of £18 million in 2010, which reflects strong returns on investments in hedge funds and property partly offset by changes in interest rate yields, leading to lower discount rates on non-profit liabilities.
Variance on owners’ funds The favourable variance on owners’ funds of £19 million for 2010 mainly relates to fair value gains on interest rate swaps held in the shareholder fund partially offset by losses on interest rate swaps held in the Holding Companies.
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.
Non‑recurring items 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. −An increase in the expense reserves of Phoenix Life of £23 million following the new fee arrangement between Phoenix Life and IGNIS. IGNIS will recognise the benefit of this new arrangement as it is earned on an annual basis and so this charge should reverse over time.
with effect from the acquisition of the Pearl businesses in the third quarter of 2009 the Company has been managed and controlled from Jersey, where its permanent office premises are located. As a Jersey resident holding company the Company is subject to a zero percent tax rate on its income. Consequently, tax charged in these accounts primarily represents uK tax on profits earned in the uK, where the principal subsidiaries, excluding Opal Re, have their centre of operations.
The Group tax credit for the year attributable to owners is £74 million despite profits (after policyholder tax) of £6 million. This reflects the benefit of tax losses crystallised on the restructuring of the Group’s life insurance businesses and the effect of non-taxable dividend income.
The Group has significant excess tax losses and expenses at the end of the year which have not been recognised in full.
capital management framework The Group’s capital management framework is designed to achieve the following objectives: −Provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital −Ensure sufficient liquidity to meet obligations to policyholders and creditors −Optimise the overall gearing ratio to ensure an efficient capital base −Meet the dividend expectations of owners as set by the Group’s dividend policy, within the restrictions in the Group’s two main credit agreements.
The Group’s IGD assessment is made at the level of the highest EEA insurance group holding company, which is Phoenix Life Holdings Limited (’PLHL’), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 31 December 2010 is £1.0bn (2009: £1.2bn). The components of the estimated IGD calculation are shown below: £bn £bn
The key drivers of the change in solvency position in the year are: −Dividend payments, pension contributions and debt servicing and repayments of £0.4 billion, partly offset by −Capital generation items of £0.2 billion including capital benefits from the NPL funds transfer in the first quarter of 2010 and surpluses in the non-profit funds established during the period which are available for transfer to shareholders.
1 Further details on the regulatory capital requirements of the individual life companies are included within note 42 of the IFRS financial statements.
The Group’s capital policy, which is agreed with the FSA, is to maintain GCR at the PLHL level of: −105 percent of the with-profit insurance component (’wPICC’), an additional capital requirement of with-profit funds; plus −145 percent of the GCRR less the wPICC.
The court sanctioned funds transfer of the PALAL business into PLL was effective from 1 January 2011. This increased the headroom to £0.2 billion as at 1 January 2011.
IGD Excess Capital IGD Excess Capital represents a more realistic measure of the capital strength of the Group as it includes policyholder and certain shareholder capital which is currently excluded under FSA rules from the PLHL Group’s IGD surplus calculation. This capital provides the Group with financial flexibility and is available to protect policyholders and shareholders from adverse events as demonstrated by the insensitive nature of the IGD surplus to market stresses.
The excluded capital relates to: −the surplus estate of the with-profits funds which is treated as a policyholder liability for IGD purposes due to the closed fund nature of the business −restricted assets which mainly relate to assets excluded from the IGD calculation due to the corporate structure of the PLHL Group.
IGD Excess Capital 2.8 3.1 Restricted assets (0.4) (0.6) Excess policyholder capital (1.4) (1.3) IGD surplus 1.0 1.2 Coverage percentage on IGD Excess Capital 170% 191%
Solvency II It is anticipated that 2011 will be a key year in the development of Solvency II with the European Commission expected to release Level 2 implementing measures in June and consultation on the Level 3 guidance expected to commence soon after. The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums.
capital resources The primary sources of capital used by the Group are equity, perpetual reset capital securities and subordinated debt.
Bank debt at face value – Pearl facility 425 425 – Pearl loan notes 76 75 – Impala facility 2,138 2,260 – Royal London PIK notes and facility 106 102 Tier 1 Bonds at market value 304 264 PLL subordinated debt at market value 170 156 Shareholder debt (including hybrid debt)2 3,219 3,282 Holding Company cash and cash equivalents (486) (202) Net shareholder debt 2,733 3,080
The Group intends to improve operational and financial flexibility through a targeted reduction in the gearing ratio to below 50 percent by the end of 2011, a level consistent with the relative stability of the cash flows in the Group’s closed book business model.
Liquidity management Details of the Group’s objectives and policies for the management of liquidity risk are included within the Risk management section and note 43 of the IFRS financial statements.
1 Net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and PVFP of IGNIS.
2 The unsecured loan notes are excluded from this shareholder debt analysis as their repayment will be funded from an escrow account which is not included in the Holding Company cash and cash equivalents.
Each committee has formal terms of reference which are approved by the relevant divisional Executive team. Overall reporting of risk management and escalation of emerging issues is undertaken through divisional management committees to the PLHL ExCo and reported to the PLHL and Group Boards via regular risk reporting.
risk management framework overview The Group’s risk management framework is underpinned by its governance model which includes statutory boards and their committees, management committees, risk policies, oversight committees and established governance functions.
The Group Board Risk Committee has responsibility for the oversight of risk across the Group. The Group Board Risk Committee comprises five Non-Executive Directors and met five times during the year. The Committee is supported by the Group Chief Risk Officer, Jean Park.
A series of divisional management oversight committees covering financial and operational risks exists within the Group. These committees are responsible for ensuring the risks associated with the divisional business activities are identified, controlled, monitored and reported to the relevant Boards and Board Committees.
risK manaGement 45 Phoenix Group Holdings Annual Report and Accounts 2010
The policies define: −The risks the policy is intended to manage −The degree of risk the Group is prepared to accept in managing the risks the policy is intended to manage – the risk appetite −The minimum controls required in order to manage the risk to an acceptable level −The frequency of the control’s operation.
A Group-level risk assessment process determines the most significant risks to the Group and the options available for their management. The Board Risk Committee receives a Consolidated Risk Report on a quarterly basis, detailing the risks facing the Group within each of the Group’s main risk categories (Strategy, Market, Credit, Insurance, Financial Soundness and Operational). Regular risk reporting is provided to the Boards, PLHL ExCo and the respective divisional oversight committees.
The potential limitation on distributions from the Group’s FSA regulated companies may impair the ability of the Group to service its existing debt commitments.
The Group has ongoing principal repayment and interest obligations to its lending syndicate. 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 Phoenix Life segment 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. Assets held to meet obligations to policyholders include debt securities. 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.
The Group regularly monitors its counterparty exposure and has specific limits relating to counterparty credit rating. where possible, exposures are diversified through the use of a range of counterparty providers. All reinsurance and derivative positions are appropriately collateralised and guaranteed.
There are other closed fund consolidators as well as a number of other potential purchasers. while the prices of closed fund life companies and portfolios may have decreased due to recent market conditions, there can be no assurance that prices will not increase if markets continue to recover. Moreover, the Group may face difficulties in obtaining additional financing for any acquisitions.
The Group is well positioned to be the natural consolidator for closed funds and maintains an ongoing dialogue with potential vendors.
“ Companies carry responsibilities that lie beyond the balance sheet, the bottom line and the dividend. But the discharge of those responsibilities can be positively aligned to success in the delivery of conventional financial metrics. This is because taking responsibility – for the treatment of our people, the environment, the communities in which we live and work and the way in which we deal with customers and all our counterparties – builds trust which is the basis of a successful and sustainable business.”
In this section 50 Corporate Responsibility 51 Approach 51 The workplace 52 External stakeholders 55 Community 55 Environment 49 Phoenix Group Holdings Annual Report and Accounts 2010
During 2010 we reviewed our Corporate Responsibility activities and have established a programme that will be built on in 2011 and beyond. Our programme recognises that our commitment to responsibility in the management of our business will help to create long-term value.
During 2010 we joined Business in the Community (‘BITC’), which is a business-led charity offering advice and support to its members on how to create a sustainable future for our people, the planet and how to improve business performance. We look forward to continuing this work with BITC during 2011, to articulate further what this responsibility looks like in our workplace, and for external stakeholders, our community and the environment.
Our Corporate Responsibility activity focuses on four areas of activity in which value is created: Workplace – We know from surveys that our people have a strong moral conscience and real concern for the environment and those less fortunate than themselves. Every element of our Corporate Responsibility activity makes us more attractive as an employer and so adds value through its role in the motivation, retention and recruitment of the best talent.
external stakeholders – The way we deal with external stakeholders creates value by developing trust, respect and support for our business objectives. Failure causes reputational damage which poses risks to our ability to execute our strategy. Dealing with our external stakeholders responsibly, with integrity and transparency, not promising more than we can reasonably expect to deliver and keeping our word are the cornerstones of reputation and our approach. Our activity aims to embed these behaviours within our culture.
Community – Our approach to community governs the contribution we make to the community in which our employees and customers live and work, and our obligations to broader society. This approach creates value through increased employee engagement and enhanced corporate reputation.
environment – Our approach to environmental matters is defined by our commitment to monitoring and reducing the environmental footprint of our business. This approach also contributes to the sum of employee engagement and increasingly, to our attractiveness as a potential employer.
We have established a Corporate Responsibility programme which focuses on our internal and external stakeholders as well as our environmental footprint.
approach The Phoenix approach to Corporate Responsibility is embedded in our Corporate Governance and Corporate Responsibility policies, both of which are sponsored by the Group Chief Executive Officer.
Our people are our most important asset and they are vital to the success of our business. Building an engaged, productive workforce provides significant opportunities to enhance our business performance, benefiting customers, shareholders and employees alike.
Our people are our most important asset and we have demonstrated strong employee engagement scores compared to both our target and the Financial Services benchmark.
−To drive new standards and behaviours in the management of ‘closed book’/‘run-off’ businesses. −To deliver the behaviour which a properly informed and prudent customer is reasonably entitled to expect of us; and to deal with all our customers honestly, openly, competently and with integrity. −To have an informed understanding of our customers’ needs. −To be committed to helping our customers get the most out of their relationship with us.
−In the same group six functional areas returned an employee engagement score that was below the 2010 target of 70 percent and action plans will be implemented to improve engagement in these areas. −IGNIS participated in the survey for the first time and achieved an EEI of 60 percent. In light of the significant change activity that took place through 2010 this score was encouraging. The embedding of single management teams across the different site locations is expected to be a factor in driving engagement through 2011.
These include: −Dedicated and experienced teams of people committed to the highest standards of people management in the provision of a safe and pleasant working environment where each employee’s contribution is recognised and fairly rewarded whilst respecting an appropriate work/life balance. −A clear Group-wide people strategy to enable the organisation to optimise the contribution of its people. −A protocol of regular and transparent employee surveys with interim ‘testing of the waters’ through informal soundings led by our Senior Management Group. −Individual learning and development plans, both regulatory and non-regulatory. −Succession planning.
Customer satisfaction Through a regular programme of surveys and one-to-one interaction with our customers, we are able to gain a better understanding of customer expectations, and identify any areas of improvement that are required first hand. Our aim is to provide a responsible, fair and helpful service. As a Group we recognise that sometimes things will go wrong, or that our customers may be unhappy with an element of their product or service. We take all complaints seriously, and have introduced several new measures this year which we will track going forward. We also intend to identify and learn from our root cause analysis, which we will continue to develop in 2011.
Our monthly customer satisfaction telephone survey for 2010 produced the measure of 4.5 out of a possible 5, where customer satisfaction was reported as at least ‘good’. This compares to 4.3 in 2009. Any customer feedback is analysed and where a number of customers report similar experiences, or a trend is identified, these are reviewed internally to identify whether any changes or improvements are required. Our annual statement communication is in the process of being streamlined, as customers made us aware that our communication pack was too detailed and lengthy.
o r p o r a t e r e s p o n s
In September 2010, the FOS published data for the first half of 2010. We exclude banks from our definition of industry average (which made the target tougher) to enable a truer peer group comparison. 34 percent of Phoenix Life cases and 17 percent of Pearl Assurance cases were overturned by the Ombudsman compared to the peer group average of 35 percent, which meant that we achieved our target. We are very committed to improvement and we hope that the measures we have taken will reduce both the number of cases going to the Ombudsman and the proportion of those cases where the Ombudsman rules against us.
In 2011, we intend to review our procurement process to strengthen our policies to ensure that suppliers meet our standards of responsible and ethical behaviour.
Further information on the Stewardship Code and our approach to responsible investment is included on IGNIS’ website www.ignisasset. com/institutional/our-approach/ stewardship-policy.
Dealing with complaints Our customer research programme this year has focused on our complaints and claims processes, identifying key areas where we can improve further.
CORPORATE RESPONSIBILITY CONTINuEd 54 Phoenix Group Holdings Annual Report and Accounts 2010
Meanwhile, IGNIS staff entered a team in the Women’s 10k Road Race, raising funds for the cardiology unit at yorkhill Children’s Hospital in Glasgow.
environment We are aware that we owe it to our customers, suppliers and staff to be a responsible organisation, and look after the environment in which we operate. It is important for a firm such as ours, which does not have a major environmental footprint, to structure its activities in a manner proportionate to the nature of our business. Whilst we do not currently monitor our environmental impact as such, we are very much engaged in recycling and energy efficiency at all our sites. Where printed materials are used, we try to ensure we use sustainable supplies and engage with suppliers that mirror our commitment to the environment. The consolidation of our life company operations into our Wythall site has continued throughout 2010, which has helped to reduce our carbon footprint, as travel between sites, and energy consumption is reduced.
For more information on the Group’s Corporate Responsibility programme, please visit the corporate responsibility section of our website at www.thephoenixgroup.com/corporateresponsibility.
The Group has various sponsorship opportunities in place, which helps generate awareness of our brands and shows our commitment to the society in which we work.
Charitable donations A total of £104,094 was donated by the Group for charitable purposes during the year. This included a donation made to the Alzheimer’s Society at Christmas in respect of our decision to send e-cards this year.
Our London office achieved a Gold Award Certificate for the 2010 Clean City Awards.
Strong and effective governance is crucial to our twin aims of delivering value to shareholders and policyholders. The Board is committed to high standards of corporate governance. This section includes details of our application of the provisions of the Combined Code on Corporate Governance and profiles of our Board of Directors.
ron sandler Chairman Ron Sandler was appointed Chairman of the Company on 24 September 2009. He is additionally Chairman of Northern Rock plc and Ironshore Inc, and is an adviser to Palamon Capital Partners. 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.
From left to right: Ron Sandler Clive Bannister Jonathan yates Ian Cormack Charles Clarke Ian Ashken René-Pierre Azria Alastair Lyons Manjit Dale Isabel Hudson David Woods Hugh Osmond David Barnes Tom Cross Brown 58 Phoenix Group Holdings Annual Report and Accounts 2010
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 a Non-Executive Director 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.
Jonathan yates Group Finance Director Jonathan yates joined the Group in May 2010 as Group Finance Director. Prior to working in the Phoenix Group, he was Chief Executive of Life Assurance Holding Corporation Limited (‘LAHC’) and its subsidiary Windsor Life (from 2004 to 2009). He also held other roles in the LAHC group including Finance Director and Development Director and successfully led a number of major transactions. Mr yates is a qualified actuary and was appointed to the Board of Directors of the Company on 23 June 2010.
C e 59 Phoenix Group Holdings Annual Report and Accounts 2010
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.
tom Cross brown Non-Executive Director Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management (which managed some €160 billion, with offices in 30 countries around the world) from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the uK from 1997 to 2003. Prior to this, he spent 21 years with Lazard Brothers in London, latterly as Chief Executive Officer of Lazard Brothers Asset
Ian ashken Non-Executive Director Ian Ashken is vice Chairman and Chief Financial Officer of Jarden Corporation, a Fortune 500 u.S. diversified consumer products company listed on the New york Stock Exchange. Mr Ashken has had extensive public company experience over the last 20 years, including as Chief Financial Officer of Benson Eyecare Corporation, Lumen Technologies and Bollé Inc. Mr Ashken is a Principal and Executive Officer of a number of private investment entities. He was appointed to the Board of Directors of the Company on 2 September 2009.
rené-pierre azria Non-Executive Director René-Pierre Azria is Chief Executive Officer of Tegris Advisors LLC, a u.S. private advisory firm specialised in strategic financial analysis and mergers and acquisitions. Prior to founding Tegris, Mr Azria was a worldwide partner with Rothschild & Co. Prior to joining Rothschild in 1996, Mr Azria served as Managing Director of Blackstone Indosuez and President of Financiére Indosuez Inc. in New york. Mr Azria serves as a Director and Compensation Committee member of Jarden Corporation, a NySE listed Fortune 500 u.S. conglomerate, and of two privately held book publishers in France and the u.S. Mr Azria was appointed to the Board of Directors of the Company on 2 September 2009. He is a member of the Board Risk Committee.
Hugh osmond Non-Executive Director Hugh Osmond founded Punch Group and was its Executive Chairman between 1997 and 2001, during which time he built Punch Group into one of the 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. Mr Osmond also serves on the Board of Horizon plc. He was appointed to the Board of Directors of the Company on 2 September 2009. Mr Osmond is a member of the Board Risk Committee.
David Woods Non-Executive Director David Woods is a Fellow of the Institute of Actuaries and is currently Non-Executive Chairman of Royal Liver Assurance and a Non-Executive Director of Standard Life uK Smaller Companies Trust plc, Murray Income Trust plc and The Moller Centre for Continuing Education. He is also Chairman of the pension fund trustee companies responsible for the governance of all the uK pension schemes in the Steria Group and is a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group. He was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
Management. Mr Cross Brown is Non-Executive Chairman of Just Retirement (Holdings) Limited, and a Non-Executive Director of Artemis Alpha Trust plc, as well as of other private companies and charities. Mr Cross Brown served on the Board of Directors of the former Pearl Group Limited from May 2005 until September 2009. He was appointed to the Board of Directors of the Company on 24 September 2009. He is a member of the Board Nomination and Board Risk Committees.
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 €2.5 billion of assets on behalf of a variety of institutional pension funds, university endowments and wealthy private individuals. Prior to founding TDR Capital, Mr Dale was Managing Partner at Deutsche Bank Capital Partners Europe. He has served on the Boards of Pizza Express and Center Parcs. Mr Dale has over 20 years’ experience in private equity, finance and consulting gained with BankersTrust, 3i plc, NM Rothschild and Andersen Consulting. Mr Dale graduated from Cambridge university with an Honours Degree in Economics. He served on the Board of Directors of the former Pearl Group Limited from December 2004 to September 2009. Mr Dale was appointed to the Board of Directors of the Company on 2 September 2009.
The information that fulfils the Business Review requirements can be found in the Business Strategy and Performance sections on pages 12 to 47 and is incorporated by reference into this Directors’ Report.
board of Directors The membership of the Board and biographical details of the Directors are given on pages 58 to 61 and are incorporated into this report by reference to the pages. 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 74 to 85.
−Jonathan Moss resigned from the Board on 7 February 2011. He was replaced as Chief Executive Officer by Clive Bannister who was appointed to the Board on 28 March 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.
Directors’ indemnities Following shareholder approval on 15 March 2010, the Company has entered into a deed of indemnity by way of deed poll with its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply to the extent prohibited by any applicable law.
Corporate governance statement The disclosures required by section 7.2 of the Financial Service Authority’s Disclosure and Transparency Rules can be found in the Corporate Governance Report on pages 67 to 73 which is incorporated into this Directors’ Report by reference.
Financial controls The Group operates a financial controls policy within the Risk Management Framework. This incorporates minimum control standards within risk appetite for the internal control and risk management systems in relation to the process for preparing consolidated accounts.
The Memorandum and Articles of Association are available on the Company’s website, www.thephoenixgroup.com/investor-relations/additional-information.aspx.
During 2010 the Company issued 5,020,000 shares in connection with the operation of the ACSM in respect of the 2009 deferred coupon on the Tier 1 Bonds (as set out in note 19.1 of the IFRS financial statements). The shares were issued at a discount of 2.94%. As these shares were issued under the ACSM it was not necessary to use the authority granted at the 2010 AGM in relation to the disapplication of pre-emption rights.
The rights and obligations attaching to the Company’s ordinary shares are set out in the Company’s Articles of Association.
Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Services Authority and the Group’s own share dealing rules whereby Directors and certain employees of the Group require the approval of the Company to deal in the Company’s ordinary shares.
name No. of ordinary shares held Percentage of shares in issue
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 are set out in note 15 to IFRS financial statements.
In addition certain provisions of the Articles relating to the City Code on Takeovers and Mergers apply in connection with a takeover bid. The Articles are available on the Company’s website, www.thephoenixgroup.com/investor-relations/additional-information.aspx.
supplier payment policy The Company and its subsidiaries do not follow any code or standard on payment practice, but it is the policy to pay suppliers within 30 days of the invoice date or, if different, in accordance with any terms agreed with suppliers.
annual General Meeting (‘aGM’) The AGM of the Company will be held at 32, Commercial Street, St Helier, Jersey JE2 3Ru on Friday, 13 May 2011 at 1pm.
Disclosure of information to auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
The Company achieved a Premium Listing on the London Stock Exchange on 5 July 2010. It is a member of the FTSE 250 Index and de-listed from Euronext Amsterdam on 17 November 2010.
The Board is committed to high standards of corporate governance and supports the 2008 Combined Code on Corporate Governance (‘the Combined Code’) which sets standards of good practice for uK listed companies. It is the Board’s view that the Company has been fully compliant during the period from its London Premium Listing on 5 July 2010 to the end of the accounting period with the provisions set down in section 1 of the Combined Code. This statement is qualified to the extent that certain cyclical matters as follows did not occur during the period from London Premium Listing on 5 July 2010 to the end of 2010: −The Company’s first AGM since its London Premium Listing will take place on 13 May 2011, and it is intended that the Company will comply with the provisions of both the Combined Code and the uK Corporate Governance Code which will apply to the Company from 1 January 2011. −The Board Nomination Committee review of the balance of skills, knowledge and experience of the Board was undertaken in March 2011.
The Board is responsible to the shareholders for the overall governance and performance of the Group. Overall, the Board’s role is to provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating principles. These matters include: −Group strategy and business plans −Major acquisitions, investments and capital expenditure −Financial reporting and controls −Dividend policy −Capital structure −The constitution of Board Committees −Appointments to the Board and Board Committees −Key Group policies including the remuneration policy for the Company’s Directors
The schedule of matters reserved for the Board is available from the 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 Executive Management under a schedule of delegated authorities approved by the Board.
During 2010, the steps taken by the Board to improve its governance arrangements, supporting the move to a London Premium Listing, included: −Establishing a Combined Code compliant Board comprised of at least 50 percent Independent Non-Executive Directors −Establishing Board Audit, Nomination, Remuneration and Risk Committees, all consisting of Non-Executive Directors and in compliance with Combined Code requirements −Developing the Group’s Policy Framework to support embedding the Group’s Risk Appetite −Holding the Company’s first AGM at which all Directors offered themselves for re-election −undertaking its first Board, Board Committee and individual Director performance evaluation −Reviewing succession planning for the Board and senior management −Meeting nine times during the year including a two-day event to review and debate strategy
The process involved completion by Directors of a questionnaire covering various aspects of Board and Director effectiveness, followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed and approved by the Board in December 2010. The process and report covered the following areas: −Board composition and meeting process −Board information −Induction and training −Board dynamics −Board accountability/effectiveness −Committee evaluation
A review of each Director’s individual performance took place as part of the evaluation, and the output from this will be utilised in revising the training programme for Directors.
The output from the Board and individual Director reviews informed the review of the Board composition and structure undertaken by the Nomination Committee in March 2011.
Attendance by each of the Directors at Board meetings during the year was: Board Meetings Nomination Committee Audit Committee
The Audit Committee has recent and relevant financial experience. The composition of the Committee is in accordance with the requirements of the Combined Code that the Audit Committee should consist of at least three independent Non-Executive Directors of which at least one has recent and relevant financial experience. Following its establishment on 29 March 2010, the Audit Committee met six times during 2010.
3 Simon Smith resigned from the Board on 23 June 2010.
6 Charles Clarke was appointed to the Board on 18 February 2010.
The Company has adopted a Charter of Statutory Auditor Independence, which requires both the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external audit engagement partner. The Charter can be found on the Company’s website.
Audit Committee’s principal activities during 2010 −Reviewed the Company’s Annual Report and Accounts, half-year financial statements and 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 the financial forecasts prepared by management for 2011 to 2013, supported by the sensitivity analysis on the key assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern and in support of dividend payments. −Reviewed Working Capital, Financial Reporting Procedures and Long Form Reports relating to the Prospectus for the Company’s London Premium Listing and the disclosures in the Prospectus relating to matters within the remit of the Audit Committee. −Assessed the effectiveness of both the external auditors and the internal audit function. −Approved the Group Internal Audit Charter and the Group Internal Audit Plan, receiving regular reports to monitor progress against the plan.
−Reviewed the engagement and remuneration of the external auditors, recommending their re-appointment to the Board and thence to shareholders. −Reviewed and monitored the independence of the statutory auditors including their provision of non-audit services.
During 2010 the Nomination Committee met to review its duties and how they should best be addressed. It also reviewed the process being undertaken for the Board Effectiveness Review which was concluded in December 2010 (see above). The Committee agreed that the outcome of the Board Effectiveness Review would inform the Committee’s review of the Board structure, size and composition which would take place in 2011 prior to the Board putting forward Directors for re-election at the 2011 Annual General Meeting on 13 May 2011.
The composition of the Committee accords with the requirements of the Combined Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met four times during 2010.
The Remuneration Committee is responsible for making recommendations to the Board on the Company’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors and other senior Executives in the Group. These include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure and the Committee’s activities in 2010 are provided in the Remuneration Report on pages 74 to 85.
The establishment of a Risk Committee is not a requirement of the Combined Code. However, the Board believes such a Committee is important to ensure the robust management of risk for the Group. The composition of the Committee, with a majority of independent Non-Executive Directors is in accordance with the final recommendations of the report by Sir David Walker ‘A review of corporate governance in uK banks and other financial industry entities’.
The Company’s Investor Relations department is dedicated to facilitating communication with institutional investors. The Directors consider it important to understand the views of shareholders and in particular any issues which concern them. The Chairman and the NonExecutive Directors provide feedback to the Board on topics raised with them by major shareholders. Should major shareholders wish to meet the newly appointed Directors, or any of the Directors generally, they are welcome to do so.
Financial reporting and going concern The Directors have acknowledged their responsibilities in the Statement of Directors’ Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2010 (refer to page 88.)
review of system of internal controls The Combined Code requires Directors to review the effectiveness of the Company’s systems of internal controls which includes financial, operational and compliance controls and risk management systems. The Board has overall responsibility for the Group’s systems of internal controls and for reviewing their effectiveness. The Group’s systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board’s review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 28 March 2011. Actions are being taken to remedy any significant failings and weaknesses identified by the review.
The Board (and its subsidiary company Boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2010 in accordance with the ‘Internal Control: Revised Guidance for Directors on the Combined Code’ published by the Financial Reporting Council.
I am pleased to introduce the Remuneration Report for 2010. During the year and following the Premium Listing of the Company’s shares on the London Stock Exchange in July 2010, the Remuneration Committee has carried out a review of senior executive remuneration arrangements. The main conclusions of the review, which are set out in more detail in the report which follows, are: −Base salary levels are broadly appropriate for the size and complexity of the business, in light of relevant market data −Annual incentive potential remains appropriate at 150 percent of base salary although the current multiplicative approach to personal and corporate measures is overly complicated and not consistent with market practice. Instead, for 2011, the current approach will be replaced with a more market consistent additive structure, with 20 percent of potential based on personal and strategic measures and 80 percent of potential based on embedded value, cash flow and cost management targets −The level of annual incentive deferral will be increased to market consistent levels. For any incentive paid for 2011, one third will now be deferred into shares for three years (compared with the deferral of any award above target operated in 2010) −Consistent with best practice, the Committee will operate a clawback provision which will operate for any annual incentive amounts subsequently found to have been based on materially inaccurate results −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 2011 will be at similar levels and be based on similar performance metrics to those granted in May 2010, with the precise targets set just prior to the awards being granted −Consistent with best practice, the Committee will operate share ownership guidelines. Executive Directors will be required to build and maintain a specified shareholding in the Company (200 percent of salary for the Chief Executive Officer and 100 percent of salary for the Group Finance Director) through the retention of all post tax shares which vest under the LTIP (or any other discretionary long-term arrangement introduced in the future) until target holdings have been achieved
The Committee has also honoured the share commitment made to the Company Chairman in relation to his 2009 recruitment, dealt with the replacement of the Group Finance Director and, following the year end, the Chief Executive Officer. Details of the Chairman’s share award and the termination arrangements and recruitment packages for the Chief Executive Officer and Group Finance Director roles are set out overleaf.
The Committee met in early 2011 to consider the impact of the revisions to the FSA’s Remuneration Code published in late December 2010 and which took effect on 1 January 2011. The Committee has concluded that, although insurance businesses are not affected, the Group’s asset management business (IGNIS) is categorised as a ‘Tier 4’ firm. The Committee has identified all group companies affected by the Code and identified those staff who are within its ambit (‘Code Staff’). The Committee will be extending its terms of reference to include these individuals. The Committee is satisfied that no significant changes to remuneration practices will be necessary and is considering how best to meet the new disclosure obligations which must be published before the end of 2011.
The Committee has worked hard over the past year on the Group’s remuneration policy and structures (many of which reflected the Group’s previous ownership structure) with the objective of aligning them with uK best practice and the current business strategy. I encourage shareholders to support the new arrangements.
Remuneration Committee Chairman 75 Phoenix Group Holdings Annual Report and Accounts 2010
The table below shows the independent Non-Executive Directors who served on the Committee during 2010: Member From To
None of the Committee members has 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 makes recommendations to the Board. No director plays a part in any discussion about their own remuneration. The terms of reference of the Committee are available at: www.thephoenixgroup.com.
Remuneration policy General policy Executive remuneration packages are structured so that they: −Are aligned to the Group’s strategy −Are aligned with the interests of shareholders, with a significant proportion performance-related −Are competitive but not excessive, in relation to the uK Life Insurance and asset management markets −Do not drive unacceptable behaviours or encourage unacceptable risk taking −Take into account Group-wide pay and employment conditions. The Committee reviews the average Group-wide base salary increase and bonus costs and is responsible for all discretionary and all employee share arrangements
Jonathan Moss Chief Executive Officer1 £650,000 £650,000 Jonathan yates Group Finance Director £415,000 £400,0002
With effect from 1 January 2011, Jonathan yates’ base salary was increased by 3.75 percent to £415,000 to reflect his performance and increasing experience in the role from appointment.
Benefits received by Executive Directors comprise a car allowance, private medical insurance, relocation and life assurance.
1 until 7 February 2011 (see Appointment of new Chief Executive Officer section below).
Details of the actual incentive payments awarded for 2010 are presented in the emoluments table and notes on page 82.
In addition to the above targets, the Committee must be satisfied that management has identified and managed material business risks in an appropriate manner for any incentive payment to be paid.
Following a review of deferral levels, the level of annual incentive deferral has been increased to market consistent levels. For any incentive paid for 2011, one-third of any annual incentive paid (compared with any award above target operated in 2010) will now be deferred into shares for 3 years. The shares comprising the deferred element will vest three years from the date of award and will normally be forfeited if the individual leaves the Group prior to vesting.
Consistent with best practice, the Committee will operate a clawback provision which will operate for any annual incentive amounts subsequently found to have been based on materially inaccurate results.
Long-term incentives The Long-Term Incentive Plan (‘LTIP’) is designed to reward management for delivering the Group’s strategic objectives and improve the alignment between the interests of management and shareholders. Each year, participants receive awards of shares in the Group which will normally vest three years after they were awarded, subject to the satisfaction of performance conditions measured over a three-year period and continued service. The LTIP’s annual individual limit is 300 percent of base salary (400 percent in exceptional circumstances) although the current policy is to award Executive Directors no more than 200 percent of base salary (with lower levels awarded below Board).
Debt underpin Notwithstanding the Ev 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.
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 percent of salary for the Chief Executive Officer, 100 percent 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.
Jonathan Moss 5 February 2010 12 Jonathan yates 6 May 2010 12
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external Boards or committees as long as these are not deemed to interfere with the business of the Group. In 2010, following his appointment to the Board of Phoenix Group Holdings, Jonathan yates earned £20,000 from an external directorship.
Appointment of new Chief Executive Officer Clive Bannister was appointed Group Chief Executive Officer from 8 February 2011. A summary of the main elements of his package, which is consistent with the existing Executive Director remuneration policy, is as follows: Base salary £700,000 p.a.
REmuNERATION REPORT CONTINuEd 80 Phoenix Group Holdings Annual Report and Accounts 2010
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 Committee. Fees for both 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.
For 2010, fee levels were set at £450,000 for the Chairman of the Board, £100,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable where an individual also Chairs the Audit, Remuneration or Risk Committee; and/or (ii) £10,000 payable where a Non-Executive Director also sits on the Board of a subsidiary company. Following a review of fees for 2011, an additional fee of £5,000 will be paid for the role of Senior Independent Director and the additional fee for those Non-Executive Directors serving on subsidiary Boards will be increased to £20,000 to reflect their time commitment (although their base fee will be reduced from £100,000 to £90,000). Other fee levels remain unchanged.
Isabel Hudson6 86,026 – – – – 86,026 – Alastair Lyons7 82,500 – – – – 82,500 –
5 Following a review of the Annual Bonus paid to Simon Smith in 2010 an additional amount of £99,174 was paid following the 2009 Report & Accounts being published. As a result the total emoluments for 2009 shown in the table above have been accordingly adjusted.
9 Annual incentive amounts are presented inclusive of any amounts which must be deferred in shares for three years (i.e. 2010 incentive award amounts in excess of target). Of the amounts presented above, £109,375 of Jonathan yates’ incentive payment will be deferred in shares for a period of 3 years. Full details of the number of shares under award will be disclosed in the 2011 Remuneration Report.
**The transfer value basis is agreed by the Trustees of the Scheme having taken advice from the Scheme Actuary. The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of the director’s pension benefits. They do not represent sums payable to the director and therefore cannot be added meaningfully to annual remuneration. The increase in the transfer value is the increase in the transfer value of the accrued benefits during the year, taking into account any changes in valuation assumptions. No other Executive Director participates in this scheme.
Share-based awards As at 31 December 2010, Directors’ interests under long-term share-based arrangements were as follows: Date of grant Share price on grant As at 1 Jan
Simon Smith 1 The performance condition attached to the 21 September 2009 LTIP award was a successful Premium Listing on the London Stock Exchange. Following shareholder approval of the Premium Listing at the 2010 Annual General Meeting, these awards vested early on the date of Admission. The share price at vesting was 671p.
6 On vesting, the shares awarded under the LTIP were appointed into sub-trusts of the Phoenix Group Holdings employee benefit trust, for the benefit of Jonathan Moss’ family. It is expected that on vesting the shares to be awarded under the BSP on termination date will also be appointed into this sub-trust.
7 On vesting, the shares awarded under the LTIP and BSP were appointed into sub-trusts of the Phoenix Group Holdings employee benefit trust for the benefit of Simon Smith’s family.
Sharesave options were granted on 22 January 2010 to Jonathan Moss and Simon Smith. Simon Smith’s Sharesave options lapsed on cessation of employment on 3 October 2010. Jonathan Moss’ Sharesave options are due to lapse on 29 March 2011.
René-Pierre Azria 16,391 16,866 David Barnes – 2,300 Charles Clarke – 2,000 Ian Cormack – – Tom Cross Brown – 1,6152
Manjit Dale3 – – Isabel Hudson – 1,587 Alastair Lyons – 7,500 Hugh Osmond 717,166 9,714,0154
Aside from the shares purchased by Tom Cross Brown, there have been no other changes in the interests set out above between 31 December 2010 and 28 March 2011.
2 Tom Cross Brown’s shares were purchased on 27 January 2011.
3 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 33,982,314.
Performance graph The graph below shows the value by 31 December 2010, on a total shareholder return basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Group’s Premium Listing on the London Stock Exchange) compared with the value of £100 invested in the FTSE 250 index (excluding investment trusts).
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 Group is a constituent.
The IFRS operating profit of £373 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 2010 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 2010 and their development in the financial year to which the Annual Report and Accounts relate; and 3. That the Annual Report describes the principal risks facing Phoenix Group Holdings.
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 Netherlands Civil Code, and for the preparation of the Directors’ report in accordance with Part 9 of Book 2 of the Netherlands 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; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
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 2010, 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 Netherlands Civil Code.
Requirements of the Listing Rules We have nothing to report in respect of the following items that we are required to review under the Listing Rules: – the Directors’ statement, set out on page 62, in relation to going concern; and – the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review.
Matters on which we report by exception because of voluntary compliance with the UK Companies Act 2006 We have nothing to report in respect of the following items that we are required to report to you under the UK Companies Act 2006 if, in our opinion: – adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or
– the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit; or – a Corporate Governance Statement has not been prepared by the Company.
Gross premiums written 1,534 545 Less: premiums ceded to reinsurers (85) (31) net premiums written 1,449 514
Net investment income 7 5,907 1,032 total revenue, net of reinsurance payable 7,518 1,647
Change in present value of future profits 33 7 4 Amortisation of acquired in-force business 33 (147) (50) Amortisation of customer relationships 33 (18) (7)
Net (expense)/income attributable to unitholders (97) 43 total operating expenses (7,263) (1,536)
pRo FoRMA RECoNCILIATIoN oF GRoup opERATING pRoFIT To pRoFIT ATTRIbuTAbLE To owNERS for the year ended 31 December 2010
total comprehensive income for the year 156 169 attributable to: Owners of the parent 106 129 Non-controlling interests 50 40
The statement of consolidated comprehensive income for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four month post-acquisition period only.
Operating profit Phoenix Life 388 285 IGNIS Asset Management 46 14
Tax credit/(charge) attributable to owners 13 74 (16) Profit for the year attributable to owners 80 135
STATEMENT oF CoNSoLIDATED CoMpREhENSIvE INCoME for the year ended 31 December 2010 91 Phoenix Group Holdings Annual Report and Accounts 2010
Net asset value attributable to unit holders 1,937 946 Obligations for repayment of collateral received 25 10,160 4,106
Accruals and deferred income 30 214 177 total liabilities 81,264 74,796 total equity and liabilities 83,564 76,936 92 Phoenix Group Holdings Annual Report and Accounts 2010
Acquired in-force business 2,016 2,163 Customer relationships 420 438 Present value of future profits 42 35
Fixed and variable rate income securities 40,899 37,658 Collective investment schemes 7,144 6,094
Insurance assets Reinsurers’ share of insurance contract liabilities 20 2,939 2,860 Reinsurance receivables 263 264 Insurance contract receivables 19 17
Notes 2010 £m 2009 £m cash flows from operating activities Cash generated/(absorbed) by operations 41.1 3,392 (357) Taxation recovered 3 37 net cash flows from operating activities 3,395 (320)
Profit for the year − − − − − 30 30 50 80 Other comprehensive income for the year − − − − − 76 76 − 76 total comprehensive income for the year − − − − − 106 106 50 156
Dividends paid on ordinary shares − (34) (20) − − − (54) − (54) Dividends paid to non-controlling interests − − − − − − − (18) (18) Coupon paid to non-controlling interests, net of tax relief − − − − − − − (47) (47)
On acquisition of the Pearl businesses − − − − − − − 699 699
Retained earnings comprises 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. There is a restriction on the ability of certain subsidiary companies to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Group’s two main credit agreements.
NoTES To ThE CoNSoLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2010 1. accounting policies (a) Basis of preparation The consolidated financial statements for the year ended 31 December 2010 comprise the financial statements of Phoenix Group Holdings (‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRS’) and also in accordance with Part 9, Book 2, of the Netherlands Civil Code.
The financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings including collective investment schemes where the Group exercises overall control. Certain of the collective investment schemes have non-coterminous period ends and are consolidated on the basis of additional financial statements prepared to the period end. The non-controlling interest in the collective investment schemes is classified as a liability and shown in the statement of consolidated financial position as net asset value attributable to unit holders. Intragroup balances and income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements.
Impairment of intangible assets Intangible assets are subject to regular impairment reviews as detailed in accounting policy (n). Impairments are measured at the difference between the carrying value of a particular asset and its recoverable amount. Impairments are recognised in the consolidated income statement in the period in which they occur.
Income taxes Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. The UK taxation regime applies separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets. Any judgements made, and uncertainties considered, in arriving at the carrying value of deferred tax in the financial statements are discussed in note 28.
Pension benefit assets and liabilities The valuation of pension benefit assets and liabilities is determined using actuarial valuations, which involves making assumptions about discount rates, expected return rates on assets, future salary increases, mortality rates and future pension increases. As defined benefit pension plans are long-term in nature, such assumptions are subject to significant uncertainty. Details of the key assumptions used are shown in note 32.
(c) Foreign currency transactions Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Group’s presentation currency.
Foreign currency transactions are translated into the functional currency of the transacting Group entity using average exchange rates at the date of translation. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
Financial guarantee contracts Where a group company enters into a financial guarantee contract to guarantee the indebtedness of other companies within the Group, the Group considers these to be insurance arrangements and accounts for them as such. On this basis the Group only recognises a liability in circumstances whereby it is likely a payment will need to be made under the terms of the guarantee.
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.
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 fair value of the intangible asset is less than its carrying value.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and subsequently are re-measured to fair value. Exchange-traded derivatives are valued at the published bid price, or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. The gain or loss on re-measurement to fair value is recognised in the consolidated income statement.
1. accounting policies (continued) Fair value estimation The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives are 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. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair value is by reference to published bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.
(s) Reinsurance The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers’ share of insurance contract liabilities are dependent on expected claims and benefits arising under the related reinsured policies.
(u) Provisions and contingent liabilities A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where the Group has a present legal or constructive obligation but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
(w) Dividends Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group’s owners. Interim dividends are deducted from equity when they are paid. As permitted by Cayman Islands Companies Law, dividends have been charged within equity against share premium account and other reserves account. Where shareholders exercise a scrip dividend option the amount of the related dividend is credited to share premium in the statement of consolidated changes in equity and an amount equal to the nominal value of the shares issued is transferred from share premium to share capital.
Fee and commission income Fee and commission income relates to the following: – fund management based fees, which are recognised as the services are provided; – investment contract income – investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. ‘Front end’ fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided; and – other fees, which are recognised as the services are provided.
1. accounting policies (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.
Share-based payments Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 18.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of nonmarket -based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
Finance costs Interest payable is recognised in the consolidated income statement as it accrues and is calculated by using the effective interest method.
(z) Share capital and shares held by the employee trust and group entities Ordinary share capital The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
Shares held by the employee trust and group entities Where an employee trust or a group entity acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’ equity. Gains and losses on sales of shares held by the employee trust and group entities are charged or credited to the own shares account in equity. Currently, any shares in the Company which are purchased by the Company itself would be cancelled automatically by operation of law and would not be held as own shares.
(aa) General business The general insurance business has been closed to new business for a number of years and is in run-off. The results are included within other operating income in the consolidated income statement. Provisions are made for the estimated cost of claims, including claims incurred but not reported after taking into account handling costs, anticipated inflation and settlement trends. Any difference between the estimated provision and subsequent settlement is included in the consolidated income statement in later years.
(cc) Events after the reporting period The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.
– IFRS 3 Business Combinations (Revised). This converges International and US reporting requirements relating to business combinations. – IAS 24 Related Party Disclosures (Amended). This amends the definition of a related party, clarifies its intended meaning and eliminates inconsistencies. These amendments have, as permitted, been early adopted from 2010. – IAS 27 Consolidated and Separate Financial Statements (Revised). This revises the accounting for non-controlling interests and the loss of control of subsidiaries. – Annual improvements 2009. This makes a number of minor improvements to existing standards and interpretations. – IFRIC 17 Distributions of Non-Cash Assets to Owners. IFRIC 17 provides guidance on how an entity should account for distributions of non-cash assets to its owners, other than in limited circumstances. – IFRIC 18 Transfers of Assets from Customers. IFRIC 18 applies to the accounting for transfers of property, plant and equipment by entities that receive such transfers from their customers.
– Group Cash-settled Share-based Payment Transactions (Amendments to IFRS 2). This clarifies the scope of IFRS 2 and the accounting for group cash-settled share-based payment transactions in the separate or individual financial statements of the entity receiving the goods or services.
The consolidated performance statements and associated notes to the accounts for the year ended 31 December 2009 therefore incorporate the results of the acquired Pearl businesses for the four month post-acquisition period only.
For management purposes, the Group is organised into business units based on their products and services and has two reportable segments as follows: – Phoenix Life – this segment manages a range of whole life, term assurance and pension products; and – IGNIS Asset Management – this segment provides investment management services to the life companies within the Group and to third parties, covering both retail and institutional investors.
Net investment income: Offset interest income on interest swaps against interest
Other operating income: Net policyholder claims and benefits incurred: Non-recurring (64) − − − (64)
Depreciation and amortisation: Depreciation of property, plant and equipment − (3) − − (3) Amortisation of acquired in-force business (147) − − − (147) Amortisation of customer relationships (15) (3) − − (18)
Offset interest income on interest swaps against interest expense* − − 53 − 53
Net premiums written from: External customers 514 − − − 514 Other segment − − − − −
Net policyholder claims and benefits incurred: Non-recurring (74) − − − (74)
Depreciation and amortisation: Depreciation of property, plant and equipment (1) (1) − − (2) Amortisation of acquired in-force business (50) − − − (50) Amortisation of customer relationships (6) (1) − − (7)
4. Segmental analysis (continued) 4.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result 2010
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 – an increase in the expense reserves of Phoenix Life of £23 million following the new fee arrangement between Phoenix Life and IGNIS. IGNIS will recognise the benefit of this new arrangement as it is earned and so this charge will reverse over time.
Liabilities £m 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 reflects the impact of the reduction in credit spreads on corporate bonds and equity, property and yield movements.
5. Investment return variances and economic assumption changes (continued) 5.3 Calculation of the long-term investment return The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties.
Investment income Interest income on loans and receivables 57 76 Interest income on impaired financial assets 5 − Interest income on financial assets designated at fair value through profit or loss on initial recognition 1,911 818 Dividend income 492 321 Rental income 78 52 Net expected return on pension assets (18) (9)
Impairment losses on loans and receivables (12) − Fair value gains/(losses)
Financial assets at fair value through profit or loss Held for trading – derivatives (17) (385) Designated upon initial recognition 3,324 −
Investment property 87 159 net investment income 5,907 1,032 8. Other operating income 2010 £m 2009 £m
Acquisition costs paid 12 8 10. administrative expenses 2010 £m 2009 £m
The average number of employees for the year ended 31 December 2009 has been presented for the period following the acquisition of the Pearl businesses on 28 August 2009.
11. auditors’ remuneration The remuneration of the auditors of the Company, including their associates, in respect of services supplied to entities included in the consolidated financial statements was £13.6 million (2009: £7.2 million). No services were provided by the auditors of the Company to associated pension schemes.
Interest expense On borrowings at amortised cost 196 64 On borrowings at fair value through profit or loss 73 23
On non-profit surpluses (32) (51) On amortisation of acquired in-force business (50) (17) On amortisation of customer relationship intangible (5) − On profit arising from the changes in assumptions used for determining insurance liabilities in accordance with PS 06/14 − (5) Capital allowances in excess of depreciation − 1 On accrued interest (38) − Losses on group restructuring not matched in accounts (33) − Tax losses arising in the current year carried forward (17) (26) Pension scheme movements 19 16 On provisions for future expenditure (6) (12)
Utilisation of tax losses 57 63 Change in the rate of corporation tax (19) − Write down of deferred tax assets 2 −
Attributable to: The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge/(benefit) attributable to policyholder earnings was £5 million (2009: £(60) million).
13.2 Tax charged to other comprehensive income 2010 £m 2009 £m
Deferred tax on actuarial gains of defined benefit schemes (4) 31 13.3 Reconciliation of tax credit 2010 £m 2009 £m
Profit before tax 11 91 Policyholder tax (charge)/credit (5) 60 Profit before the tax attributable to owners 6 151
On 27 August 2010, the Board declared an interim dividend of £0.21 per share. A scrip dividend option was available to shareholders and the dividend that was settled on 15 October 2010 amounted to £34 million. The value of the dividend that settled via the scrip dividend option was £11 million.
15. earnings per share (continued) The basic earnings per share of 20.1p (2009: 102.9p) has been based on the profit of £30 million (2009: £95 million) and a weighted average number of ordinary shares outstanding during the year of 149 million (2009: 92 million), calculated as follows: million million
Issued ordinary shares at beginning of the year 130 53 Effect of ordinary shares issued/redeemed 19 39 Weighted average number of ordinary shares 149 92
Weighted average number of ordinary shares 149 92 Effect of warrants in issue − 14 Weighted average number of ordinary shares (diluted) 149 106
The Founders’, Sponsors’ and IPO warrants were not dilutive in 2010 due to the exercise price of the warrants being significantly higher than the share price of the Company. In light of the current share price of the Company, it is considered unlikely that the warrants will vest. The Founders’ and Sponsors’ warrants were converted into ordinary shares during 2010.
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because, due to their exercise price, they do not have a dilutive effect for the periods presented: – 5 million warrants issued to the Lenders on 2 September 2009; – 12.36 million warrants issued to Royal London on 2 September 2009; and – the Founders’, Sponsors’ and IPO warrants from 2 September 2009 on which date the exercise price of the outstanding warrants was increased from €7 to €11.
Issued and fully paid: 171.5 million (2009: 80.4 million) ordinary shares of €0.0001 each 13,904 6,067 Nil (2009: 49.8 million) ‘B’ ordinary shares of €0.0001 each − 4,383 118 Phoenix Group Holdings Annual Report and Accounts 2010
In connection with the Company’s Premium listing, all 52,032,123 issued and fully paid ‘B’ ordinary shares were converted into ordinary shares on 5 July 2010 by way of a variation of rights and re-designation on a one-for-one basis. The holders of the 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. Prior to this, the holders of the ordinary and ‘B’ ordinary shares had identical rights to returns and voting.
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 held by group entities. During the year 1,580,671 further shares were purchased on market and 595,740 shares were awarded to employees (see note 18). The number of shares held by the PGH EBT at 31 December 2010 was 1,484,931 (2009: 500,000).
On 5 July 2010, the Company implemented a restructuring of the contingent rights over its shares as explained in note 16. As a result 383,188 shares were issued to Pearl Assurance Limited.
18. Share-based payment 18.1 Share-based payment expense The expense recognised for employee services receivable during the year is as follows: 2010 £m 2009 £m
Expense arising from equity-settled share-based payment transactions 8 3 Expense arising from cash-settled share-based payment transactions 1 − total expense arising from share-based payment transactions 9 3
18.2 Share-based payment schemes in issue 2010 Long-term incentive plan During 2010, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in embedded value and cumulative cash generation over a three year period and will not vest until 28 May 2013. There are no cash settlement alternatives.
The fair value of these awards was estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted.
Save As you Earn (‘SAyE’) The SAyE scheme allows participating employees to save up to £250 each month over a period of either 3 or 5 years.
The following information was relevant in the determination of the fair value of the SAyE awards in the year: Share price (£) 6.50 Exercise price (£) 5.63 Expected life (years) 3.25 and 5.25 Risk-free rate (%) 2.0 (for 3.25 year scheme) and 2.8 (for 5.25 year scheme) based on UK Government
Gilts with a term commensurate with the expected term for each award. Expected volatility (%) 30.0 which is based on the company’s share price volatility to date. Dividend yield (%) zero
Sponsors’ warrants For the year ended 31 December 2010 £nil has been recognised as a share-based payment charge (31 December 2009: £2 million).
18.3 Movements in the year The following table illustrates the number of, and movements in, share options during the year: no of share options 2010 No of share options 2009 2009 ltIP 2009 BSP Deferred cash plan 2010 ltIP SaYe 2009 LTIP 2009 BSP
Outstanding at the beginning of the year 403,750 403,750 − − − − −
Forfeited during the year − − − (106,241) (121,395) − − Exercised during the year (474,047) (117,500) − − (5,339) − − Outstanding at the end
The weighted average fair value of options granted during the year was £4.95 (2009: £8.42).
At 1 January − − − On acquisition of the Pearl businesses 518 181 699 Profit for the year 9 31 40 Dividends paid − (8) (8) Effect of share transactions − (3) (3)
The Notes are unsecured obligations of PGH1 and are subordinate to the claims of senior creditors. Payments in respect of the Notes are conditional upon PGH1 being solvent at the time of payment and immediately following such payment.
The Notes have no fixed maturity date and interest payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes. The Notes also meet the conditions for Innovative Tier 1 capital treatment in the calculation of Group Capital Resources under the rules of the FSA. As the Notes are not held by the Company, these are disclosed as a non-controlling interest in the consolidated financial statements.
On 25 March 2009, the Board of PGH1 gave notice to the holders of the Notes of its decision to defer the coupon payment on the Notes at the next payment date of 25 April 2009 and PGH1 indicated that it had no present intention to initiate the ACSM at that time.
On 22 April 2010, the holders of the Notes agreed to a number of amendments to the Notes, including a 15% reduction in the face value of the Notes, the amendment of the ACSM and the imposition of an additional restriction on the payment of dividends by the Company if future coupons are deferred. The 15% reduction in face value of the Notes emerges in the statement of consolidated financial position as a £70 million reduction in non-controlling interests representing the impact of this reduction on the Notes held by external noteholders. Following these amendments, PGH1 settled in full on 26 April 2010 the 2010 coupon due on the Notes and settled in full via the issue of ACSM instruments the 2009 coupon on 18 November 2010.
Amounts due for settlement after 12 months 42,376 2,719 40,150 2,722
Transfer to statement of consolidated comprehensive income in respect of actuarial losses of defined benefit pension scheme (27) − − −
£200 million 7.25% unsecured subordinated loan (note g) 127 119 170 156 Unsecured loan notes (note h) 12 18 12 18 £100 million PIK notes and facility (note j) 106 102 106 102 £75 million secured loan note (note k) 72 70 72 70
Debenture loans (a) In 1998, National Provident Institution raised £260 million of capital through the securitisation of embedded value on a block of existing unit-linked and unitised with-profit life and pension policies. Following the demutualisation of National Provident Institution, these were transferred to National Provident Life Limited (‘NPLL’). The bonds are split between two classes, which rank pari passu. The £140 million 7.39% class A1 limited recourse bonds with an outstanding principal of £27 million (2009: £42 million) have an average remaining life of 1 year maturing in 2012. A principal repayment of £15 million was made in September 2010 as per the terms of the agreement. The £120 million 7.59% limited recourse bonds with an outstanding principal of £120 million (2009: £120 million) have an average remaining life of 8 years maturing in 2022. NPLL has provided collateral of £77 million (2009: £88 million) to provide security to the holders of the NPLL recourse bonds in issue.
(b) On 3 June 2008, Axial Fixed Income Opportunities S.a.r.l. issued A loans consisting of €459,886,325; £39,480,573 and US$288,125,702. On 13 June 2008, Axial Fixed Income Opportunities S.a.r.l. issued further A loans of £128,401,000 and on 11 July 2008, Axial Fixed Income Opportunities S.a.r.l. issued further A loans of US$29,780,400. These loans accrue interest at LIBOR plus 125 bps and mature in June 2015. Due to the strengthening of the pound against the dollar, the carrying value has fallen during the year. These loans were settled in full on 21 March 2011.
(d) In 2008, UKCPT entered into an £80 million revolving loan facility agreement. This loan accrues interest at LIBOR plus a variable margin of 0.50% to 0.60% per annum. The lender holds a floating charge over certain assets of UKCPT and its subsidiaries. The repayment date for this facility is 19 June 2015.
(g) Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001. The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, as a part of a Part vII transfer, these loan notes were transferred into the shareholder fund of Phoenix Life Limited (‘PLL’). In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). Phoenix Group Holdings acquired these subordinated loan notes at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of financial position. The fair value adjustments which were recognised on acquisition will unwind over the remaining life of these subordinated loan notes.
(i) On 14 May 2008, PGH (LC1) Limited and PGH (LC2) Limited jointly obtained a £2,260 million loan facility from a syndicate of external banks (the ‘Impala Facility’). This facility was split into Tranche loans A, B and C of £1,275 million, £492.5 million and £492.5 million respectively. The terms of this facility were subsequently amended on 2 September 2009, to the following: – Tranche A loan of £1,275 million is repayable over the period from 30 April 2011 to 30 November 2014 and attracts interest at LIBOR plus a cash margin of 1.00% and a PIK margin of 1.00% for the first four years, and LIBOR plus a cash margin of 2.50% for the subsequent years; – Tranche B loan of £492.5 million is repayable on 30 November 2015 and attracts interest at LIBOR plus a cash margin of 1.25% and a PIK margin of 0.75% for the first four years, and LIBOR plus a cash margin of 3.25% for the subsequent years; and – 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.
22. Borrowings (continued) Debenture loans (continued) (k) On 15 November 2006, PGH (LCA) Limited and PGH (LCB) Limited jointly became a party to a £905 million loan facility from a syndicate of external banks (the ‘Pearl Facility‘). On 2 September 2009, this facility was restructured as follows: – £75 million of the existing facility was converted into two tranches of £37.5 million each of secured C loan notes repayable after 15 years and attracting interest at LIBOR plus a margin of 1.00%; – £325 million of the existing facility was assigned to Phoenix Group Holdings from the lending banks for consideration of £75 million, with a maturity date of 30 June 2016, attracting interest at LIBOR plus a margin of 1.25%; and – the terms of the remaining £425 million outstanding under the existing facility were amended and the facility is repayable over the period from 30 June 2011 to 30 June 2016, attracting interest at LIBOR plus a margin of 1.25%.
The borrowings under the £425 million facility are secured by first fixed and floating charges over all of the assets and undertakings of PGH (LCA) Limited and PGH (LCB) Limited (including their respective 50% shareholdings in Phoenix Life Holdings Limited (‘PLHL’), all real estate, book debts, bank accounts, investments and other assets).
During the year, interest of £2 million was capitalised on the £75 million secured loan note.
Total return bond swaps 73 24 27 − Equity options 186 − 191 −
Where the Group receives collateral on derivatives in the form of cash it is recognised in the statement of financial position along with a corresponding liability to repay the amount of the collateral received, disclosed as ‘Obligations for the repayment of collateral received’. The amount recognised as a financial asset and a financial liability at 31 December 2010 is £818 million (2009: £1,041 million) and £821m (2009: £1,099 million) respectively.
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 financial position. The value of assets pledged at 31 December 2010 amounted to £500 million (2009: £455 million).
Warrants over shares On 1 January 2009, the Company had in issue 15 million Founders’ warrants and 60 million IPO warrants. On 2 September 2009 12.36 million warrants were issued to Royal London and 5 million were issued to the Lenders. The table below shows a reconciliation of the outstanding number of these warrants: IPO
Forfeiture of Founders’ warrants and shares (2 September 2009) − (63,600) − − Conversion of 50% of outstanding warrants into ordinary shares
Issue of warrants to Royal London and Lenders (2 September 2009) − − 5,000,000 12,360,000 Conversion of IPO warrants into new ordinary shares
At 31 December 2010 the Founders’ warrants were valued at £nil million (2009: £7 million) and the IPO warrants were valued at £2 million (2009: £8 million).
All outstanding Lenders’ warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £19.50 on each of 20 consecutive trading days. On 15 October 2010, this threshold of £19.50 was amended to £19.32. The Company must give not less than 30 days notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
The exercise period terminates on the first to occur of: – 5th anniversary of the date issued; – date fixed for the redemption of the warrants; and – liquidation of the Company.
All outstanding warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds €16.50 on each of 20 consecutive trading days. On 15 October 2010, this threshold of €16.50 was amended to €16.34. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
The key assumptions used to ascertain a value as at 31 December 2010 are as for the IPO warrants (see above). The value of the warrants at the year end was £3 million (2009: £6 million).
Amount due for settlement after 12 months 6,366 6,928 129 Phoenix Group Holdings Annual Report and Accounts 2010
Current tax receivables 5 44 Net deferred tax assets − 81 total tax assets 5 125
At 1 January (695) − On acquisition of the Pearl businesses − (695) Amounts credited to the income statement 122 31 Amounts charged/(credited) to the statement of other comprehensive income 4 (31)
A gradual reduction in the UK corporation tax rate from 28% to 24% over the next 4 years was announced in the Emergency Budget of 22 June 2010 with a further 1% reduction being announced in the Budget of 23 March 2011. The Finance (No. 2) Act 2010 included the first of the 1% rate reductions with effect from April 2011, with further reductions to be dealt with by future legislation. The benefit to the Group’s net assets arising from the further 4% reduction of rate is estimated as £65 million in total and will be recognised as the legislation is substantively enacted.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 103 141 Excess expenses and deferred acquisition costs carried forward 22 50 Provisions and other temporary differences 7 3 Deferred tax assets not recognised on capital losses* 165 210 * These can only be offset against future capital gains and have no expiry date.
Pearl Assurance Limited Within Pearl Assurance Limited the provision for the future claims payments has primarily been assessed in accordance with actuarial methods projecting the number and amount of claims separately. Where there is a notable exposure to long-term asbestos, pollution and health hazard liabilities, external independent actuaries provide best estimate benchmarks. An appropriate prudential margin is applied to certain lines of business as it is recognised that the estimation of certain future claims payments is an inherently uncertain exercise and future experience could be more adverse.
Amount due for settlement after 12 months 9 4 31. Other payables 2010 £m 2009 £m
Defined contribution scheme Contributions in the year amounted to £2 million (period from 28 August to 31 December 2009 £1 million).
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 compared with the previous triennial funding valuation deficit of £383 million.
32. Pension schemes (continued) 32.1 Pearl Group Staff Pension Scheme (continued) Defined benefit scheme (continued) The principal employer and the Trustees of the Pearl Scheme entered into an agreement which became effective on 2 September 2009, the principal terms of which provided for the following: – A cash payment into the scheme of £63 million in October 2009 followed by cash payments of £25 million per annum for a period of 10 years, commencing on 30 September 2010, subject to certain capital resource and other requirements being maintained. As a result of the 2009 triennial valuation, the Trustee has established the payments due between 2020 and 2027 under the 2009 agreement. These contributions are calculated from projected scheme deficits, calculated on a funding basis, as follows: £2 million payable on or before 30 June 2020, £39 million payable on or before 30 June 2021; £35 million payable on or before each of 30 June 2022, 30 June 2023 and 30 June 2024, and £41 million payable on each of 30 June 2025, 30 June 2026 and 30 June 2027. The amounts payable on and from 30 June 2021 may alter in the light of any funding shortfall disclosed as at the triennial funding valuation immediately preceding their date of payment. – The Trustees being granted a first charge over shares in Pearl Assurance Limited, National Provident Life Limited, London Life Limited, Pearl Group Services Limited and PGS 2 Limited to secure an amount not exceeding 60% of the deficit arising on the triennial scheme valuation (as calculated in accordance with the terms of the agreement), subject to an initial amount and a maximum of £600 million, such security ceasing on a scheme buy out, the principal employer discharging its liabilities under the agreement or upon a valuation of the scheme demonstrating there is no funding deficit if earlier. Enforcement of the security may take place on the occurrence of various events, the main ones being (i) a failure by the principal employer to pay agreed cash contributions to the scheme, (ii) an insolvency or other similar financial difficulties of the principal employer, (iii) except in certain defined circumstances, payments of interest or principal to the principal employer’s lenders or of dividends to the principal employer’s owners being made at a time when the principal employer has failed to maintain an embedded value of at least 1.3 times the amount secured, (iv) the principal employer failing to maintain an embedded value of at least 1.05 times the amount secured or (v) the principal employer granting certain types of security over its assets. NP Life Holdings Limited has also granted a limited recourse share charge over the shares it holds in National Provident Life Limited in favour of the Trustee in respect of the principal employer’s obligation under this agreement. This security is granted on substantially the same terms as the security granted by the principal employer.
The net actuarial gains recognised in other comprehensive income comprise the following: 2010 £m 2009 £m
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amount to £67 million (2009: £29 million).
The deficit recognised in the statement of financial position is as follows: 2010 £m 2009 £m
Expected return on scheme assets 82 27 Actual return less expected return on scheme assets 19 36
The change in the present value of the defined benefit obligation is as follows: 2010 £m 2009 £m
At 1 January 1,805 − On acquisition of the Pearl businesses − 1,791 Current service cost 1 − Interest cost 100 32 Actuarial (gains)/losses (19) 7 Benefits paid (85) (25)
At 1 January 1,684 − On acquisition of the Pearl businesses − 1,583 Expected return on scheme assets 82 27 Actual return less expected return on scheme assets 19 36 Contributions by the employer 25 63 Benefits paid (85) (25)
Contributions totalling £25 million are expected to be paid into the scheme in 2011 in accordance with the agreement with the Trustee of the Pearl Scheme.
Experience gains on scheme liabilities 70 58 135 Phoenix Group Holdings Annual Report and Accounts 2010
Defined contribution scheme Contributions in the year amounted to £4 million (period from 28 August 2009 to 31 December 2009 £1 million).
A triennial funding valuation of the PGL Scheme as at 30 June 2009 was completed in September 2010. This showed a deficit on the funding basis as at 30 June 2009 of £255 million compares with the previous triennial funding valuation deficit of £69 million. Following discussions with the Trustee of the PGL Scheme it was agreed that new cash contributions to the scheme amounting to £159.5 million would be paid over the period from September 2010 to August 2017.
Together with the outstanding contributions of £28 million due to the scheme as at the end of August 2010 following the previous triennial valuation, this totalled £187 million, of which it was agreed that £50 million would be paid in 2010, £30 million in each of 2011 and 2012, £23 million in 2013, £15 million in each of 2014, 2015 and 2016 and £10 million in 2017. Contributions of £10 million were made to the scheme in the period up to the end of August 2010 and a further £50 million was contributed as described above, giving a total contribution for the year of £60 million.
In accordance with an agreement dated November 2005, certain of the Group’s with-profit funds have indemnified the Group’s owners in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. Completion of the triennial valuation has resulted in a recovery from the with-profit funds of £37 million, together with interest, in respect of the balance due in relation to the cost of changes in longevity assumptions determined by the previous triennial valuation. Accordingly a contribution in respect of actuarial losses has been made by the with-profit funds of this amount, less tax, resulting in £27 million being recognised in the consolidated statement of comprehensive income.
The principal financial assumptions of the PGL Scheme are set out below.
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 both the discount and inflation rates, which is derived from the profile of projected benefit payments.
The economic value of the PGL Scheme assets as at 31 December 2010 amounted to £1,326 million (2009: £1,192 million) and the economic value of the surplus amounted to £133 million (2009: £62 million). For financial reporting purposes the carrying value of the insurance policies effected by the PGL Scheme with the Group amounting to £74 million (2009: £66 million) has been eliminated on consolidation, resulting in reported assets of the PGL Scheme as at 31 December 2010 of £1,252 million (2009: £1,126 million) and a reported surplus of £59 million (2009: deficit of £4 million).
The amounts recognised in the income statement are as follows: 2010 £m 2009 £m
Actual return less expected return on scheme assets 81 23 Experience (loss)/gain arising on scheme liabilities (23) 18 (Loss)/gain due to changes in assumptions underlying scheme liabilities (19) 35
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £83 million (2009: £76 million).
The change in the fair value of the scheme assets is as follows: 2010 £m 2009 £m
The distribution of the scheme assets at the end of the year was as follows: 2010 £m 2009 £m
Experience (losses)/gains on scheme liabilities (23) 18 138 Phoenix Group Holdings Annual Report and Accounts 2010
Present value of future profits £m total £m cost or valuation
Charge for the year − 147 18 − 165 carrying amount
Cost or valuation At 1 January On acquisition of the Pearl businesses 77 2,213 445 31 2,766
Amortisation At 1 January − − − − − Charge for the year − 50 7 − 57
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million (2009: £39 million) and to the IGNIS Asset Management segment is £38 million (2009: £38 million).
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 9.6% (2009: 11.4%). The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between 5 and 7 years.
The amortisation charge for customer relationships is presented separately in the consolidated income statement.
During the year £7 million (2009: £4 million) of PvFP was credited directly to the consolidated income statement.
The valuation of land and buildings is carried out at least every three years as at 31 December by external surveyors in accordance with the Royal Institution of Chartered Surveyors’ requirements under an open market valuation basis. The latest valuation was undertaken on 31 December 2009.
Investment properties include £235 million (2009: £252 million) property reversions arising from sales of the NPI Extra Income Plan. The reversionary interest is valued as the NPI and NPLL proportion of the current market value, projected for the lifetime of the policyholder at the assumed future increase in house prices, then discounted back by the valuation rate of interest.
The fair value of loans and receivables at amortised cost amounted to £2,320 million (2009: £1,074 million).
Level 2 financial instruments. The fair values of investments that are not traded in an active market are determined using valuation techniques with observable market inputs. The fair value of shares and other variable yield securities and of derivative financial instruments, are estimated using pricing models, discounted cash flow techniques or broker quotes. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market related rate for a similar instrument.
37.2 Fair value hierarchy of financial instruments measured at fair value level 1 £m level 2 £m level 3 £m total fair value £m
Fixed and variable rate income securities 33,672 3,167 819 37,658 Collective investment schemes 5,859 − 235 6,094
Financial liabilities designated at fair value through profit or loss upon initial recognition Investment contract liabilities − 8,570 − 8,570
Equities − − Fixed and variable rate income securities 96 573 Collective investment schemes − −
Financial assets at fair value Derivatives − − Financial assets designated at fair value through profit or loss upon initial recognition
Equities − − Fixed and variable rate income securities 226 334 Collective investment schemes − −
Investment contract liabilities − − Borrowings − − Net asset value attributable to unit holders − −
37.5 Movement in Level 3 financial instruments measured at fair value at 1 January 2010 £m total gains/ (losses)
Financial assets Derivative assets − (22) 111 − 89 (202) Financial assets designated at fair value through profit or loss upon initial recognition Equities 1,494 64 (766) 1 793 19 Fixed and variable rate income securities 819 (43) 32 (61) 747 150 at 1 January 2010 £m total gains in income statement £m
Purchases and sales £m transfers from level 1 and level 2 £m at 31 December 2010 £m
Financial liabilities designated at fair value through profit or loss upon initial recognition Net asset value attributable to unitholders 154 14 − − 168 43
Fixed and variable rate income securities − 839 (18) 80 (82) 819 (18)
Financial liabilities designated at fair value through profit or loss upon initial recognition
Net asset value attributable to unitholders − 170 8 (24) − 154 29
Level 3 financial instruments are transferred to Level 1 or Level 2 as and when the conditions of each Level are met. During 2010 the Group has seen an increase in observable inputs leading to a reduction in Level 3 financial instruments.
Where the Group receives collateral 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 the collateral received. The amount recognised as a financial asset and a financial liability at 31 December 2010 is £9,222 million (2009: £2,780 million) and £9,339 million (2009: £3,007 million) respectively.
41.2 Cash flows on acquisition of the Pearl businesses 2010 £m 2009 £m
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.
Insurance Groups’ Directive (‘IGD’) FSA regulated insurance groups (including their holding companies) are also required to provide an assessment of capital adequacy on a Group-wide basis to enable the FSA to assess both the level of insurance and financial risk within the group and the capital resources available to cover that risk. The assessment is known as the IGD and is the Group’s primary capital and solvency measure.
The available capital resources in each part of the business are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are: With-profit funds – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and owners. In 90:10 with-profit funds, policyholders are entitled to at least 90% of the distributed profits while owners receive the balance. In 100:0 with-profit funds, policyholders are entitled to 100% of the distributed profits. Any distribution to the owners would be subject to a tax charge which, for some funds, would be deducted from the amount received by owners.
total available capital resources at 31 December 2010 5,074 709 1,441 7,224
Owners’ funds held outside long-term fund − − − − − − − Owners’ funds held in long-term fund − − − − − − − total owners’ funds at 31 December 2010 − − − − − − −
Note 4: ’Other activities and consolidation adjustments’ represent the contribution to consolidated owners’ funds arising outside of the Phoenix Life business. This includes the owners’ funds of IGNIS Asset Management and the holding companies of the Group but primarily consists of the consolidation adjustments to eliminate the cost of the Group’s investment in the Phoenix Life business.
Owners’ funds held outside long-term fund − − 2,475 2,475 (1,955) 520 Owners’ funds held in long-term fund − 902 (10) 892 − 892 Total owners’ funds at 31 December 2009 − 902 2,465 3,367 (1,955) 1,412
Other qualifying capital: Allocation of Group capital 122 206 (328) −
Owners’ funds held outside long-term fund − − − − − − − Owners’ funds held in long-term fund − − − − − − − Total owners’ funds at 31 December 2009 − − − − − − −
Adjustments onto a regulatory basis: Other qualifying capital: Subordinated debt (note 3) 83 − − − − − 83 Contingent loans − − − − − 382 382 Allocation of Group capital 122 − − − − − 122
Note 3: Of the £720 million subordinated debt attributed to the Phoenix Life segment of the Group £520 million is internal to the Group, comprising £250 million provided to Pearl and £270 million provided to PALAL. The remaining £200 million is external subordinated debt issued by PLL.
Total available capital resources at 1 January 2010 984 927 803 294 643 819 586 1,919 6,975 changes in methodology and assumptions: management actions: Dividends paid by Phoenix Life − − − − − − − (433) (433) new business and other factors: Adjustment for internal loans in excess of counterparty limits − − − − − − (15) 64 49 total available capital resources at
Total available capital resources at 152 Phoenix Group Holdings Annual Report and Accounts 2010
43.2 Asset liability management (‘ALM’) framework The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly, market risk, credit risk and financial soundness risk. Financial soundness risk is a broad risk category encompassing liquidity and funding risk, tax risk and pension risk.
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life assurance risk in the Group arises through its exposure to mortality, longevity and to variances between assumed and actual experience in factors such as persistency levels and management and administrative expenses. More details on the Group’s exposure to insurance risk are provided in note 43.5 below.
The Group’s overall exposure to investment risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, essentially within the ALM framework that has been developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group’s ALM relies on close matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business, which includes all of the Group’s participating business, non-linked non-participating business and unit-linked business.
43. Risk management (continued) 43.3 Financial risk analysis Transactions in financial instruments may result in the Group assuming financial risks. This includes credit risk, market risk and financial soundness risk. Each of these are described overleaf, together with a summary of how the Group manages them.
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 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 £246 million (2009: £216 million).
Fixed and variable rate income securities 23,690 3,873 5,343 2,474 514 400 843 521 37,658 Reinsurers’ share of insurance contract liabilities 13 595 2,124 20 − − 98 10 2,860 154 Phoenix Group Holdings Annual Report and Accounts 2010
It is also the Group’s policy to maintain accurate and consistent internal risk ratings across its asset portfolio. This enables management to focus on the applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories of assets and are derived in accordance with the Group’s rating policy. The attributable risk ratings are assessed and updated regularly.
Fixed and variable rate income securities 40,762 − − − − 137 40,899 Reinsurers’ share of insurance contract liabilities 2,927 − − − − 12 2,939 Reinsurance receivables 263 − − − − − 263 Prepayments and accrued income 603 − − − − − 603
Cash and cash equivalents 8,999 − − − − 189 9,188
Cash and cash equivalents 5,684 − − − − 397 6,081
Assets backing unit-linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the statement of consolidated financial position. Shareholder credit exposure on unit-linked assets is limited to the level of asset manager fee which is dependent on the underlying assets. In certain circumstances the shareholder funds may be used to re-establish unit-linked assets in line with regulatory and policyholder expectations.
Collateral The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained for securities lending, certain reinsurance arrangements and to provide security against the maturity proceeds of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed and performs an impairment valuation when impairment indicators exist and the asset is not fully secured.
43.3.2 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class risk).
Interest rate risk is managed by matching assets and liabilities where practicable and by entering into swap arrangements where appropriate. This is particularly the case for the non-participating funds. For participating business, some element of investment mismatching is permitted where it is consistent with the principles of treating customers fairly. The with-profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.
Price risk (equity risk, property risk, inflation risk and alternative asset class risk) The Group’s price risk exposure relates to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.
Equity and property price risk is managed through the agreement and monitoring of financial risk profiles that are appropriate for each of the Group’s life funds in respect of maintaining adequate regulatory capital and treating customers fairly. This is largely achieved through asset class diversification.
A 10% decrease in equity prices, 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 £22 million (2009: an increase of £5 million).
A 10% decrease in property prices, 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 £52 million (2009: £22 million).
Certain Phoenix Life with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the Investment Committees of the Boards of each life company. Fluctuations in exchange rates from holdings in overseas assets are hedged against currency risks.
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that: – liquidity risk is managed in a manner consistent with the subsidiary companies Boards’ strategic objectives, risk appetite and Principles and Practices of Financial Management (‘PPFM’); – cash flows are appropriately managed and the reputation of the Group is safeguarded; and – appropriate information on liquidity risk is available to those making decisions.
Net asset value attributable to unitholders 1,937 − − − 1,937 Obligations for repayment of collateral received 9,532 122 506 − 10,160 Reinsurance payables 25 − − − 25 Payables related to direct insurance contracts 673 40 − − 713 Accruals and deferred income 205 9 − − 214 Other payables 327 − − − 327 1 year or less or on demand £m 1−5 years £m
43.4 Unit-linked contracts For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
The profitability of the run-off of the closed long-term insurance businesses within the Group depends to a significant extent on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial principles by reference to assumptions about the development of financial and insurance risks.
This general insurance business is managed by an experienced team of specialists who are responsible for all aspects of claims management, reserving and oversight of any activities undertaken by third parties. All such activity is carried out in accordance with the relevant regulations and industry standards.
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year and a decrease in equity of £24 million (2009: £27 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 £61 million (2009: £50 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 £49 million (2009: £41 million).
Change in longevity assumptions (43) (73) Change in persistency assumptions 35 94 Change in expenses assumptions 10 −
valuation interest rates (after tax for life policies) are typically in the following ranges: 161 Phoenix Group Holdings Annual Report and Accounts 2010
43. Risk management (continued) 43.5 Insurance risk (continued) 43.5.1 Assumptions (continued) 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 service providers. 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.
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 £329 million (2009: £325 million) and £20 million (2009: £46 million) respectively.
With-profits deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder to commute the annuity benefit into cash on guaranteed terms.
life: Immediate annuities 95 − 9 − Unitised with-profit 965 936 38 − Life with-profit 7,209 − 2 −
With-profit funds: Pensions: Deferred annuities − with guarantees 8,821 73 392 − Deferred annuities − without guarantees 1,550 112 − − Immediate annuities 3,679 − 671 − Unitised with-profit 1,279 9,051 90 −
Life: Immediate annuities 74 − 7 − Unitised with-profit 1,398 601 40 − Life with-profit 7,725 − 12 −
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive oneninth of the cost of bonuses declared for some funds and £nil for others.
Unitised and traditional with-profit policies are exposed to equivalent risks, the main difference being that unitised withprofit 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.
To subscribe to private equity funds and other unlisted assets 409 520 To purchase, construct or develop investment property 80 108 For repairs, maintenance or enhancements of investment property 2 3 To acquire property, plant and equipment 2 −
46. Related party transactions The Group has related party transactions with certain of its shareholders, its pension schemes and its key management personnel.
Salary and other short-term benefits 4.1 2.3 Equity compensation plans 3.1 3.6 Termination benefits 0.5 −
TDR, Hugh Osmond and Edward Hawkes are related parties for the purposes of the UKLA’s Listing Rules.
‘B’ ordinary shares of £1 PA (GI) Limited (general insurance company) UK Ordinary shares of £0.01 deferred shares of £0.25 Phoenix Life Limited UK Ordinary shares of £1 Phoenix & London Assurance Limited UK Ordinary shares of £1 Phoenix Pensions Limited UK Ordinary shares of £1 Scottish Mutual International Limited ROI Ordinary shares of €1.25 non-insurance companies Axial Fixed Income Opportunities S.a.r.l.
(investment vehicle) Luxembourg Ordinary shares of €100 IGNIS Asset Management Limited (investment management company) UK Ordinary shares of £1
‘B’ ordinary shares of £1 Opal Reassurance Limited Bermuda ‘A’ ordinary shares of £1
UK Commercial Property Trust Limited (property fund) Guernsey 66% of ordinary shares of
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 timing of the announcement and the complexity of the proposed changes means that it has not been possible to estimate their potential future impact on the deferred tax balances shown in these accounts.
On 28 March 2011 the Board declared a dividend of £0.21 per share (2009: €0.17 per share) for the year ended 31 December 2010. The cost of this dividend has not been recognised as a liability in the financial statements for 2010 and will be charged to the statement of changes in equity in 2011.
In this section 172 Statement of Directors’ responsibilities 173 Independent Auditor’s report 174 Summarised consolidated income statement
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE MARKET CONSISTENT (‘MCEV’) BASIS
When compliance with the CFO Forum MCEV principles published in October 2009 is stated those principles require the Directors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any non-compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exception of: − risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10 basis points rather than as the swap rate curve; − the value of asset management and the management service companies has been included on an IFRS basis; and
− no allowance for the costs of residual non-hedgeable risk has been made.
− provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to enable users to understand the impact of particular transactions, other events and conditions and the Group's financial position and financial performance.
Ernst & Young Accountants LLP have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2010.
As explained more fully in the Statement of Directors’ responsibilities set out on page 172, the Company’s Directors are responsible for the preparation of the Phoenix Group MCEV supplementary information in accordance with the basis of preparation set out on pages 178 to 181. Our responsibility is to audit and express an opinion on the Phoenix Group MCEV supplementary information in accordance with the terms of our engagement letter and having regard to International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2010, has been properly prepared, in all material respects, in accordance with the basis of preparation set out on pages 178 to 181.
The earnings on covered business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the UK corporate tax rate of 28%.
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME – GROUP MCEV BASIS for the year ended 31 December 2010 £m
Actuarial gains/(losses) on defined benefit pension scheme 27 (14) Exchange differences on translating foreign operations – (44)
RECONCILIATION OF MOVEMENT IN EQUITY – GROUP MCEV BASIS for the year ended 31 December 2010 £m
GROUP MCEV ANALYSIS OF EARNINGS for the year ended 31 December 2010
Capital and dividend flows – internal2 (794) 64 (18) 748 –
Capital and dividend flows – external – – – (5) (5)
Operating MCEV earnings (post-taxation) 273 10 24 (38) 269 Non- operating MCEV earnings (post-taxation) 511 (25) (4) (200) 282
− the asset management and management service companies 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 21 March 2011 the restructuring of a £1.2 billion portfolio of corporate loans was completed. The December MCEV includes a benefit of £139 million from this restructuring primarily from the additional liquidity premium expected to be earned following the restructuring.
With effect from 1 January 2011, all of the long-term business and some of the shareholders’ funds of Phoenix & London Assurance Limited were transferred to Phoenix Life Limited for £nil consideration in accordance with the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 approved by the High Court on 11 February 2011. The 2010 MCEV includes a £19 million benefit from the transfer.
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 timing of the announcement and the complexity of the proposed changes means that it has not been possible to estimate their potential future impact on the Group MCEV.
Time value of financial options and guarantees (‘TVFOGs’) The Group’s embedded value includes an explicit allowance for the time value of financial options and guarantees embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees to shareholders is calculated using market-consistent stochastic models calibrated to the market prices of financial instruments as at the period end.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Pillar1 and Pillar 2 capital requirements, plus the capital required under the Group’s capital management policy.
This equates to 119% (2009: 125%) of the minimum regulatory capital requirement.
Cost of residual non-hedgeable risks (‘CNHR’) The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
For other business the cost would be £137 million (2009: £141 million). This equates to an equivalent average cost of capital charge of 1.2% (2009: 1.6%). The level of capital assumed in this calculation is determined based on a 99.5% confidence level over a one year time horizon, consistent with the ICA methodology. Allowance is made for diversification benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.
c) Valuation of debt Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV principles.
The National Provident Life limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its unit-linked and unitised with-profits business. This securitisation has been valued on a cash flow basis, allowing for payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
New business value 18 4 22 Expected existing business contribution (reference rate) 32 27 59 Expected existing business contribution (in excess of reference rate) 10 26 36 Transfer from VIF to net worth 181 (181) –
The value generated by new business written during the period is calculated as the present value of the projected stream of after-tax distributable profits from that business. This contribution has been valued using economic and non-economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in-force covered business.
Present value of future profits (PVFP) 1-5 £m £m £m 20+ £m Total
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: 2010 2009
Term Gilt Yield +10 bps Swap Yield Gilt Yield +10 bps Swap Yield
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or in-the-money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is as follows: Additional yield over risk-free rates 0.48% 0.30%
Inflation For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index (‘RPI’) as at 31 December 2010 was taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National Average Earnings inflation is assumed to be RPI + 100 basis points as at 31 December 2010 (2009: RPI + 100 basis points).
Expenses Each life company’s projected per policy expenses are based on existing management services agreements with the Group’s service companies, adjusted to allow for additional costs incurred directly by the life companies, including, for example, regulatory fees and one-time expenses.
Valuation of debt and non-controlling interests The Group’s consolidated balance sheet as at 31 December 2010 includes Perpetual Reset Capital Securities with a face value of £425 million (2009: £500 million) and subordinated debt with a face value of £200 million (2009: £200 million) in relation to Phoenix Life Limited. These listed securities have been included within the MCEV at their market value quoted at the reporting date.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the terms of agreements with the management services companies.
In this section 190 Shareholder information 193 Glossary 189 Phoenix Group Holdings Annual Report and Accounts 2010
Annual General Meeting Our Annual General Meeting will be held on 13 May 2011 at 1pm.
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 will detail the terms of the scrip dividend alternative on or around 8 April 2011. The information booklet will also be made available on the Group’s website, www.thephoenixgroup.com
Share price You can access the current share price of Phoenix Group Holdings at www.thephoenixgroup.com
ABI Association of British Insurers – Represents the collective interests of the UK’s insurance industry.
ACSm Alternative Coupon Satisfaction Mechanism – The process through which the deferred coupon on certain securities is settled.
AGm Annual General Meeting. Alm Asset Liability Management – Management of risks that arise due to mismatches between assets and liabilities. Asset management
Black-Scholes A mathematical model used to calculate the value of an option. BSP Bonus Share Plan – The Group’s incentive programme under which a bonus is paid to employees in accordance with rules concerning eligibility, performance targets, time period, and size and form of payments.
Cfo forum A high-level discussion group formed of the Chief Financial Officers of major European listed and non-listed insurance companies.
Closed life fund A fund that no longer accepts new business and no longer accepts funds from new customers. The fund continues to be managed for the existing policyholders.
CoC Frictional Cost of Capital – The expected cost of investment expenses and tax arising from the investment of shareholder-owned assets backing the capital requirements of an insurance company.
The framework of customs, policies, procedures, laws and institutions influencing the way a corporation or company is managed.
Glossary (continued) dPf Discretionary Participation Feature – A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is contractually at the discretion of the issuer.
EEA European Economic Area – Established on 1 January 1994 and is an agreement between norway, Iceland, Liechtenstein and the European Union. It allows these countries to participate in the EU’s single market without joining the EU.
EU European Union. Euronext A pan-European Stock Exchange based in Amsterdam, Holland. EV See MCEv. financial reporting Council
GCo Guaranteed Cash Option – An option through which exercise is accomplished by a payment in cash, rather than by delivering the underlying security.
GCr Group Capital Resources – In accordance with the UK regulatory regime for insurance firms this is the aggregate of the individual capital resources for each of the regulated related undertakings less the book value of investments by the Group in those capital resources.
GCrr Group Capital Resource Requirement – In accordance with the UK’s regulatory regime for insurers it is the sum of the individual capital resource requirements for the insurer and each of its regulated undertakings.
IGd Insurance Groups Directive – The European Directive setting out the current capital adequacy regime for insurance groups.
ImmfA Institutional Money Market Funds Association – The trade association which represents the European triple-A rated money market funds industry. Insider warrant warrants held by the original founders and sponsors of the Company.
lIBor London Inter-Bank Offer Rate – The interest rate that banks charge each other for loans of varying short-term maturities.
Shareholder debt (including hybrid debt) less Holding Company cash and cash equivalents.
rCr Risk Capital Requirement – Additional amounts of capital required to be held for regulatory purposes as a result of two stress tests.
tCf Treating Customers Fairly – A central FSA principle that aims to ensure an efficient and effective market and thereby help policyholders achieve a fair deal.
UK GAAP Generally Accepted Accounting Principles adopted within the UK. VIf The value of In-Force business – The Present value of Future Profits (PvFP)
WPICC with-profit insurance capital component. The wPICC is the amount by which the regulatory surplus exceeds the realistic surplus.
Our vision To be recognised as ‘the industry solution’ for the safe, innovative and profitable decommissioning of closed life funds and as a specialised global asset manager.