The Group has implemented a business model which combines the use of in-house fi nancial control and risk management, outsourced customer administration and in-house asset management – all of which combine to protect policyholders and maximise shareholder return.
Our mission To improve returns for policyholders and deliver value for shareholders.
Phoenix Group Holdings (formerly known as Pearl Group and Liberty Acquisition Holdings (International) Company)
Liberty Acquisition Holdings (International) Company (“Liberty”) was incorporated on 2 January 2008 under the laws of the Cayman Islands as an exempted company with limited liability. Liberty was formed as a non-operating Special Purpose Acquisition Company (“SPAC”) to acquire one or more operating businesses with principal activities outside of North America. Liberty listed on Euronext Amsterdam on 6 February 2008.
Following the acquisition, Liberty changed its legal name to Pearl Group and moved its principal place of business to Jersey. Subsequently, on 15 March 2010, Pearl Group changed its name to Phoenix Group Holdings.
Aug 09 FSA confi rms non-objection to change of control of the Pearl businesses
To assist users and give shareholders a basis for future comparison, the Directors have provided additional fi nancial information on a pro forma basis. This information includes the Pearl businesses for the period 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 is separately referenced throughout the Annual Report & Accounts 2009 and is predominantly located within the sections covering Performance and the Market Consistent Embedded Value (“MCEV”) supplementary information.
Additionally, although it is not necessary for the Company to comply with the UK Companies Act 2006 (“CA06”), or, by virtue of its secondary listing on the LSE, with the UK Combined Code on Corporate Governance (“the Combined Code”) the Directors support the high standards of corporate governance and reporting they require. Accordingly the Annual Report & Accounts 2009 seek s to comply with certain of these provisions.
* The acquisition date for accounting purposes is deemed to be the date on which Phoenix Group Holdings effectively obtained control of the Pearl businesses. The point at which control passed and the acquisition became unconditional for accounting purposes is deemed to be the date on which the FSA confi rmed their non-objection to the change of control of the Pearl businesses 28 August 2009. The legal date of completion for the acquisition was fi ve days later on 2 September 2009.
Highlights Financial – Pro forma UK holding company cash inflows of £716 million – IGD capital surplus of £1.2 billion – Group MCEV of £1,827 million
Business and strategy Our business 10 Management team 11 Operating structure 12 Our goals and strategies 14
Corporate responsibility Building trust through corporate responsibility 46 Workplace 46 Marketplace 49 Community 50 Environment 51
Governance Board of Directors 54 Directors’ report 58 Corporate governance report 63 Remuneration report 68
Key performance indicators Pro forma UK holding company cash inflows £716 million
This has been a momentous year for Phoenix Group Holdings, with the acquisition of the Pearl businesses in September 2009. Against the backdrop of a global recession, these businesses required additional capital and, through a restructuring of debt obligations and an injection of new funds, their balance sheet has been strengthened by some £1 billion. The acquisition has also provided the Pearl businesses with access to public markets through the Company’s listing on Euronext and secondary listing on the London Stock Exchange (LSE).
The purchase and subsequent restructuring marks the start of an exciting phase for the newly formed Group and this is reflected in the Board’s decision to develop the Phoenix name as the core brand for the Group. Since the majority of the Group’s activities are within the Phoenix Life umbrella, there are synergies and value to be obtained by extending the Phoenix name and brand to the holding company.
The business model of the Group is a very simple one. We operate closed life funds (funds that no longer write new life policies) in the UK, with an efficient, outsourced operating platform and a leading asset management capability. We combine sophisticated asset/liability matching techniques with a prudent approach to risk to ensure that the Group is capital efficient, and the predictable cash generative characteristics of closed life funds allow us to operate with higher leverage than life companies that are still writing new business. Our scale, with more than £66 billion of assets under management and over 6.5 million policyholders, positions us as the natural consolidator of closed life funds in the UK. This is reinforced by our proven expertise in extracting synergy value through the integration of acquisitions.
“ The interests of our policyholders are closely aligned with those of our shareholders: both are well served by a Group that is financially robust, prudently managed and widely respected.”
Chairman’s report 02 Phoenix Group Holdings Annual Report & Accounts 2009
The Group’s strategy is similarly straightforward. Financial and operational stability remain our near-term focus following the acquisition and restructuring in September. We are undertaking additional portfolio de-risking and further integration of our back offices and asset management activities to deliver greater efficiencies. We are also simplifying our capital structure and migrating our share register to best match the longer term ambitions of the Group. This process will be facilitated by moving our listing from Euronext to a Premium Listing on the LSE which we are on track to achieve in the first half of 2010. We will progressively turn our attention to creating further efficiencies from within our existing portfolio of life funds and the realisation of our consolidation ambitions for the UK closed life sector as a whole. This process is financially attractive for the Group and has considerable social merit, providing the potential to deliver improvements in the security, service and returns for policyholders.
Indeed, policyholder concerns remain at the heart of everything we do. With our proud heritage of life assurance brands such as Phoenix, Pearl, Scottish Mutual, London Life and NPI, we are acutely aware of the millions of our policyholders who rely on us for their long-term financial security. We are determined that our policyholders receive continually improving levels of service and investment performance, combined with demonstrable fair treatment.
The interests of our policyholders are closely aligned with those of our shareholders: both are well served by a Group that is financially robust, prudently managed and widely respected. Nonetheless, they are not always identical and therefore it is crucial that we have strong and effective governance arrangements.
The Board of Phoenix Group Holdings has been strengthened considerably since September and we are fortunate to have been joined recently by four new Non-Executive Directors: Alastair Lyons, Charles Clarke, Isabel Hudson and David Woods, who each bring significant relevant experience. Their contribution is already in evidence as we advance our strategic thinking and build a strong platform for the future. I look forward to working with them and the rest of the Board in achieving the Group’s goals.
Looking ahead, we expect that economic conditions will remain very challenging for some time. The internal challenges faced by the Group are also not to be underestimated and much remains to be done: continuing to deliver synergies from combining the Group’s operations; overcoming a number of structural complexities en route to achieving the Premium Listing; integrating and realising value from the asset management businesses; simplifying our financial, legal and shareholding structures; creating sound long-term funding arrangements; and developing further the reputation and standing of the Group. These add up to a demanding agenda but I am confident that we are progressively putting in place the right policies and resources to realise the full potential of the Phoenix Group – for policyholders, shareholders, employees and, more widely, for the UK financial services sector and millions of consumers.
 We are progressively putting in place the right policies and resources to realise the full potential of the Phoenix Group.
As CEO of the Pearl businesses I was delighted to take on the additional responsibility of becoming the Group Chief Executive for Phoenix Group Holdings. Working closely with our Chairman, Ron Sandler, who joined the Group in September, I am committed to continuing the significant progress already made in developing the Group for the benefit of our policyholders, shareholders and employees.
Pearl businesses The end of 2008 and early 2009 was a challenging period for all business sectors. But life insurers, including the Pearl businesses, were particularly impacted by widening corporate bond spreads and falling asset markets. As a result, although the underlying life companies had sufficient capital, the extreme market dislocation challenged the sustainability of the Pearl businesses’ highly leveraged financial structure. This led to their acquisition by Phoenix Group Holdings, an injection of new capital and a significant restructuring of bank loans and other liabilities.
Overall, the restructuring strengthened the Group’s balance sheet by some £1 billion and as a result we enter 2010 in a much improved financial position. This can be evidenced by the Insurance Groups Directive (“IGD”) regulatory solvency calculation, where surplus capital amounted to £1.2 billion (or 132 percent of regulatory requirements) at the end of 2009 before allowing for the payment of the 2009 dividend, compared to a surplus of £0.7 billion at 1 January 2009.
Financial results Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009. Our primary performance measure is pro forma UK holding company cash inflows which continues to exhibit strength with £716 million remitted during the year. This is well in excess of the Group’s debt servicing obligations and ahead of our target for the year.
Phoenix Group has two core segments: Phoenix Life and Ignis Asset Management. Analysis of their results provides further evidence of a strong performance during the year.
Phoenix Life Our life companies produced a creditable result for 2009 with improving returns across the underlying businesses. We achieved a full year pro forma IFRS operating profit of £469 million (£285 million which arose in the post acquisition period from 28 August 2009).
 IGD capital surplus of £1.2 billion at 31 December 2009, an increase of £0.5 billion.
 Pro forma holding company cash inflows of £716 million generated during the year.
These are pleasing results for 2009 which provide a stable financial footing for the future.
Strategy for the future The transition of the private Pearl businesses into a listed environment has brought about a short-term change in our priorities and one key objective is to obtain a Premium Listing during the first half of 2010 (a matter covered in more detail later). However, the strategies and operating models for Phoenix Life and Ignis Asset Management remain broadly unchanged as the Board continues to support the focus on closed life insurance funds. Our Group goals are summarised below: Maximise business performance and value Deliver predictable long-term cash flow, drive increased value within Phoenix Life and increase the profits of Ignis Asset Management Improve customer outcomes Demonstrate an understanding of our customers’ needs and a commitment to deliver consistent service that provides ease of access to information and communicate in a way our customers understand Ensure the security of policyholders is protected whilst actively seeking opportunities for enhanced value Sustain a robust and scalable business model Ensure the Group is well placed to meet all its long-term obligations by delivering a structure that has optimal levels of leverage and efficient capital structuring while driving operational excellence within our underlying businesses A place where people want to work Ensure high levels of employee engagement driven by strong leadership, clear communication, fair reward and development practices Build an industry-wide reputation Ensure the Group is recognised as the industry leader in closed life fund consolidation and the safe delivery of customer outcomes Pursue value-adding acquisitions Maintain scale through selective acquisitions – execution and integration are a core competency of the Group
8p Additional information on the Group’s objectives and strategies is given on pages 14 and 15
Key 2009 achievements* It is of great credit to our employees that, despite the impact the acquisition and restructuring has had on the underlying businesses and employees during 2009, we continued to successfully deliver initiatives in line with our strategic goals. I therefore thank all employees for their hard work and energy during this period and recognise some significant achievements during the year: – Completed the funds mergers of the Scottish Mutual and Scottish Provident businesses into Phoenix Life Limited which has simplified the structure of our life companies and achieved capital, cost and tax efficiencies – Progressed the closure of Glasgow and Peterborough life company offices and associated transfer of operations to Wythall. This will simplify our operating model and creates operating synergies by consolidating our Phoenix Life business into one location – Reorganised and rebranded our asset management business to operate under the Ignis brand. This has enhanced our third party asset management offering and capability – Implemented a plan to restructure National Provident Life’s businesses – this was effected in early 2010 – Secured approval for the Guaranteed Annuity Option (“GAO”) Compromise Scheme for Phoenix and London Assurance. This removes longevity risk from the business whilst providing immediate policyholder cash enhancements – Successfully progressed the public and insider warrant exchange invitations to a conclusion. This has helped simplify the Group’s capital structure ahead of our planned premium listing – Achieved a secondary listing on the LSE in November, which has raised our profile with the UK investment market
 Completed funds mergers and progressed the closure of Glasgow and Peterborough life company offices.
of the Group’s internal programme for Solvency II please refer to our capital management report on page 36.
Dividends The Board has declared a dividend for 2009 of €0.17 per share which is expected to be paid on 15 April 2010. The 2009 dividend is in line with previous guidance of €0.50 per share per annum (pro rata from the date of the acquisition of the Pearl businesses to the year end).
10 Our business 11 Management team 12 Operating structure 14 Our goals and strategies
Business and strategy Although the markets in which we operate are complex our operating model is straightforward
We operate in two interdependent market sectors: UK life insurance and asset management. These sectors continue to face significant challenges driven by a combination of market volatility, regulatory change and shifts in customer product choice.
In order to efficiently manage the life businesses while the policies are in run-off, it is essential that we achieve a high level of variability in the cost base. This ensures that the Group is not exposed to high fixed costs in relation to the volume of policies under management. To fulfil this aim we have established a model within Phoenix Life of separating financial and risk management from policy administration. Financial and risk management are core skills and is retained in-house. Our management service operation is charged with all sourcing strategies including putting in place arrangements for third party policy administration and having oversight of their performance. We use Ignis Asset Management, our in-house asset manager to manage the policyholders’ investment portfolios.
 As a closed life business we do not need to allocate significant capital to support the writing and distribution of new insurance products.
Value of in-force 10 Phoenix Group Holdings Annual Report & Accounts 2009
Day-to-day direction of the UK operations is the responsibility of the Board of Phoenix Life Holdings Limited (“PLHL”) (a subsidiary of Phoenix Group Holdings) and its Executive Management Committee (“ExCo”). ExCo oversees matters relating to the implementation of the Group’s strategy and recommends the optimal operating structure.
The members of ExCo and their key roles and responsibilities are outlined to the right.
Management team Jonathan Moss Group Chief Executive and Director of PLHL
Lead and direct the Group’s – businesses in the delivery of the Group strategy and business plan Maximise shareholder – value and improve returns for policyholders Embed a Group culture which – recognises our policyholder obligations in terms of service and security Manage the Group’s key – external stakeholders
Lead the development and delivery – of the Ignis Asset Management business strategy including the growth of third party offerings Maximise the value of Ignis – Asset Management by delivering top quartile investment performance and a profitable service to all managed clients (including Phoenix Life) Ensure that the activities of Ignis – are undertaken with due regard to regulatory requirements
Support the Group Chief Executive – and Finance Director in the development and delivery of Group strategies and plans Maximise shareholder value though – clear, rigorous and innovative assessment of business opportunities Lead Group-wide change initiatives – and provide administrative oversight of the Corporate Office
Oversee and coordinate the – implementation of appropriate corporate governance procedures across the Group Lead the provision of legal advice – to the Group Board, ExCo and other Group Company Boards and senior management Oversee statutory administration – of Group Companies, ensuring compliance by Companies and staff with relevant legal obligations
– Oversee and manage the Group’s risk framework in line with the risk strategy and appetite Lead the Group’s risk management – function, embracing changes in best practice and regulation including Solvency II Support the enhancement of – the risk management framework at both Group and operating segment level
Operating structure Our structure is aligned to the market sectors in which we operate. The Group has two core segments: life assurance (including management services) – Phoenix Life; and asset management – Ignis Asset Management. In addition, our Corporate Office provides functional support and coordination for the delivery of the Group’s strategic initiatives.
Although the life companies are closed and do not generally write new business, they do accept additional policyholder contributions on in-force policies and allow certain policies, such as pension savings plans, to be reinvested at maturity into annuities held by a Group life company. Writing annuities offers the Group a further opportunity to increase its embedded value through incremental investment returns, while also improving the management of the liquidity position of the individual life companies.
Management services are charged with the efficient provision of financial and risk management services, sourcing strategies and delivery of all administrative services required by the Group’s life companies. To facilitate this, management services operates a number of third party contracts including outsourced policyholder administration and IT services.
Management services has approximately 700 employees in three operational centres. However, plans are well underway to centre operations in the Group’s Wythall office near Birmingham.
Ignis Asset Management Ignis Asset Management is the Group’s asset management business providing services to the Group’s life companies as well as third party clients, including retail and institutional investors. Ignis Asset Management is overseen by a management Board led by its Chief Executive, Chris Samuel and offers investment, asset/liability and fund of funds management services and has recently combined its two in-house asset management businesses under the Ignis brand.
In addition, Ignis Asset Management has an innovative joint venture/ partnership model and currently has three active joint ventures and one partnership arrangement. This provides Ignis Asset Management’s clients with a wide range of investment options and access to additional highly skilled, specialist fund management teams. Existing joint ventures include Argonaut, Cartesian and HEXAM, while Castle Hill is currently the only partnership arrangement. Ignis Asset Management provides marketing and distribution, access to research, compliance and administrative infrastructure functions on behalf of each of the joint ventures. This framework provides the joint ventures with access to the Ignis Asset Management platform and the related economies of scale, while allowing the investment managers to focus on maximising investment performance.
Corporate Office The Corporate Office brings together centralised functions that provide Group-wide services. Under the direction of its Managing Director, Diarmuid Cummins, the Corporate Office has four principal roles: T – o assist in the delivery of goals established by the Group Board To promote the Group’s strategy and profile to stakeholders – To monitor alignment of business unit plans and Group goals – To co-ordinate – Group-wide initiatives.
In 2009*, the Group maintained its focus on delivering its goals despite market turbulence and the process of acquisition. In 2010 we expect that economic conditions will remain challenging and initially our focus will be on further developing the foundations of our business from which we can realise the full potential of the Group.
Deliver predictable cash flows – Increase MCEV within Phoenix Life – Increase profits within Ignis – Asset Management
Key 2009 achievements Overall service level maintained at above – 90 percent and improved transaction times on high volume processes Complaint volumes reduced from – 2008 and speed of complaint-handling response improved
– Increased speed of processing Open Market Options 1st phase of Phoenix Life product – review completed on target Above benchmark fund performance –
2010 priorities Following continued – customer research implement appropriate initiatives to enhance customer experience
– Develop alternative solutions for low value products Pursue management actions to enhance – distributable with profit fund estate Develop – with profit fund restructure strategy
Strategies Active employee engagement programme – Enhance support framework for staff – impacted by organisational restructuring Leadership development programme –
– Safe delivery of customer outcomes Stakeholder confidence in our business – model and governance
Strategies Defined and robust corporate governance – Proactive and open stakeholder – engagement Champion of closed life fund issues –
Key 2009 achievements Enhanced corporate governance – structure implemented Strengthened our non-executive and – executive management teams E – stablished Investor Relations and Corporate Communication teams 2010 priorities Develop Phoenix Group brand awareness – Strengthen investor relations capability – Increase market, industry and media – engagement Further strengthen corporate governance – arrangements
In-depth market awareness and – open engagement with vendors Rigorous selection and evaluation – E – xecution and integration are a core competency
Dividend per share €0.17 per share Assets under management Pro forma asset management operating profit £66.9 billion £34 million
1 The Board has analysed the Group performance with reference to certain pro forma financial information. Where pro forma financial information is presented it is clearly indicated as being pro forma.
2 UK holding companies are PLHL, Pearl Group Holdings (No.2) Limited, Impala Holdings Limited, Pearl Life Holdings Limited, Pearl Group Holdings (No.1) Limited, PGH (LC1) Limited, PGH (LC2) Limited, PGH (LCA) Limited and PGH (LCB) Limited.
£1,827 million The Board considers that MCEV provides owners with the most relevant and consistent means of assessing the Group’s ability to manage the closed book of business effectively: Analysis: The Group continues to focus on improving the operating performance of its underlying businesses and the Group’s embedded value remains in line with management’s expectations As at 31 December 2009 the Group has achieved £155 million of its £300 million increment to embedded value (“EV”) target by the end of 2010 Definition and calculation: MCEV supplementary information – basis of preparation on pages 168 to 171 explains the definition and calculation Quantified target: the Group’s target is to increase EV (before payment of interest, debt principal and dividends) by up to £300 million through management actions by December 2010 and £100 million per annum thereafter to 2014. This includes targeted benefits in respect of management services actions that will not be included in the MCEV under the Group’s methodology
 The estimated IGD surplus has increased by over £500 million.
Dividend per share in respect of the four-month period to 31 December 2009 €0.17 per share (€0.50 per share pro rata from the date of acquisition of the Pearl businesses)
Assets under management (“AUM”) Pro forma asset management IFRS operating profit £66.9 billion AUM £34 million asset management IFRS operating profit For the Ignis Asset Management segment assets under management are a key driver of revenues and therefore impacts owner value: Analysis: Total assets under management saw a small reduction from the pro forma position at 1 January 2009 of £1.3 billion (1.9 percent) to £66.9 billion as the net run-off of the closed life business was largely offset by positive changes in market values on in-house and third party assets under management To provide a basis for future comparison, the pro forma asset management operating profit figure which includes 12 months of the Pearl businesses is £34 million Definition and calculation: AUM represents all assets actively managed or administered by the asset management operations of the Group The Group operating profit – IFRS section on pages 32 to 35 explains the definition and calculation of asset management IFRS operating profit
Basis of preparation This Group performance commentary provides a review of the Group’s development and performance for the year and of its financial position at the year end on both an IFRS and an MCEV basis.
The Board considers that the MCEV methodology represents a more meaningful basis of reporting the value of the Group’s life companies and the drivers of performance than IFRS.
Given the acquisition of the Pearl businesses part way during the year, the Board considers it helpful to present, on a pro forma basis, what would have been the 12-month result had the Pearl businesses been acquired from 1 January 2009. The pro forma results represent the results of the Group together with the results of the Pearl businesses prior to their acquisition by Phoenix Group Holdings.
Acquisition of the Pearl businesses As set out within the Annual report section of the inside cover, in July 2009 the owners of Phoenix Group Holdings voted in favour of the acquisition of the Pearl businesses. The total consideration for the acquisition was £493 million. The fair value of net assets acquired was £416 million, with the difference of £77 million representing goodwill. The goodwill is attributable to the Ignis Asset Management business and the management services operations within Phoenix Life.
The net assets acquired included acquired in-force business of £2.2 billion. This represents the present value of the estimated surpluses that should emerge on the purchased book of business over time. In addition, the net assets acquired include the value assigned to customer relationships and other intangibles of £476 million.
Information on the fair values of the assets and liabilities acquired is given in note 3 to the IFRS financial statements.
Group performance – Cash generation The Group’s cash flows are generated from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management. The Group’s closed life funds provide predictable fund maturity and liability profiles, creating expected long-term cash flows for distribution to policyholders and owners and repayment of outstanding debt. Although investment returns are less predictable, investment risks are mainly borne by policyholders in accordance with the terms of the relevant policies.
The table below sets out the cash remittances to the UK holding companies and the uses of the cash remittances: Pro forma UK holding company cash flow £m
Uses of cash Non-recurring cash outflows Settlement with Royal London 240 IT and other business transformation costs 67 Debt interest2 72 Transaction and restructuring costs 30 Pension scheme contributions 25 Other 10 Total non-recurring outflows 444 Recurring cash outflows Pension scheme contributions3 33 Other operating expenses 27 Debt interest 102 Total recurring outflows 162 Total uses of cash 606 * Includes 12 months of results of the Pearl businesses 1 Amounts received by UK holding companies in respect of group relief are included within cash receipts from the relevant subsidiaries.
2 Includes £7 million of interest on swaps. 3 Certain contributions are made directly by service companies to the pension scheme.
Cash receipts £466 million of cash and £194 million of cash equivalents were remitted by Phoenix Life from the emergence of surplus and regulatory capital releases. In addition a number of management actions have contributed to these remittances including the fund mergers and the resolution of specific legacy issues.
Cash equivalents As a result of resolving certain legacy issues, receipts from Phoenix Life in the year also included remittance of a £170 million receivable due from Royal London to one of the life companies. This receivable was used to offset amounts due to Royal London by other Group companies. Following a payment to Royal London in December 2009, the Group’s true-up liabilities1 to Royal London have now been settled.
IT and other business transformation costs The Group’s UK holding companies incurred IT and other business transformation costs of £67 million in 2009, including costs associated with the Group’s transformation programme with its outsourcers. Known IT and other business transformation costs of the UK holding companies are expected to reduce by between 25 and 50 percent in 2010, and by a further 50 percent in 2011, when the current operational projects are expected to be completed.
Pension scheme contributions During 2007 the Pearl businesses and the Trustees of the Pearl Group Staff Pension Scheme entered into a contract under which the Pearl businesses guaranteed returns on the defined benefit Pearl Scheme assets sufficient to ensure that there would be no funding shortfall by 30 June 2027. As an integral part of Phoenix Group Holdings’ acquisition of the Pearl businesses, agreement was reached with the Trustees of the Pearl Group Staff Pension Scheme to replace the existing funding guarantee with a schedule of cash contributions of £50 million in 2009 followed by cash payments of £25 million per annum (subject to satisfaction of capital resource requirements) for a period of ten years, commencing on 30 September 2010. The first cash payment from the holding companies to the Pearl Group Staff Pension Scheme of £50 million (included above as £25 million recurring and £25 million non-recurring) occurred in October 2009.
The supplementary MCEV information reflects the financial position of the Group at 31 December 2009. The asset management and management service businesses are included in the Group MCEV at the value of IFRS net assets and do not include the future earnings from its existing business. This is because, in the opinion of the Directors, applying the CFO Forum MCEV principles and guidance published in October 2009 to these businesses would not provide a fair reflection of the Group’s financial position as explained in the “Restatement of the pro forma 31 December 2008 Embedded Value” section on page 31.
Group MCEV operating earnings The Group generated pro forma MCEV operating earnings of £374 million before tax for the year ended 31 December 2009.
The Board is pleased to report that embedded value performance was strong in a challenging trading environment and reflects the resilient performance of Phoenix Life and Ignis Asset Management throughout the year.
MCEV operating earnings Life MCEV operating earnings 380 Management services operating profit 14 Ignis Asset Management operating profit 34 Corporate operating loss (54) Group MCEV operating earnings before tax 374 Tax on operating earnings (105) Group MCEV operating earnings after tax 269 * Includes 12 months of results of the Pearl businesses 1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is in accordance with the MCEV principles and guidance published by the CFO Forum in October 2009, except that: – risk-free rates have been defined as the annually compounded UK government nominal spot curve plus 10 basis points rather than as a swap rate curve
Expected existing business contribution 95 New business value 22 Non-economic experience variances and assumption changes – Experience variances 62 – Other operating variances 21 – Assumption changes 73 Total non-economic experience variances and assumption changes 156 Life MCEV operating earnings after tax1 273 * Includes 12 months of results of the Pearl businesses after tax 1 Life MCEV operating earnings is derived on an after tax basis. For presentational purposes
The new business margin is five percent after tax and represents the ratio of the net of tax new business value to the amount received as new single premiums.
Non-economic experience variances and assumption changes The Life divisions’ non-economic experience variances and assumption changes contributed £156 million to MCEV pro forma operating earnings after tax for the year ended 31 December 2009.
Management services The operating profit for management services comprises income from the life companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs.
Further on-going site rationalisation and staff reductions are expected to enhance annual cost savings, together with other initiatives related to the renegotiation of arrangements with outsourced service providers and aligning core business and administrative processes across the Group.
1 Recurring outsourcer expenses for the year divided by the average number of in-force policies for the year (7.4 million). The policy count is based on the Pearl businesses average policy count for the year.
In line with the Group strategy to consolidate fund management under Ignis Asset Management £1.3 billion of Phoenix Life assets currently managed by a third party are due to be transferred to Ignis Asset Management in 2010. In addition, approximately £5.5 billion of Life funds managed by a third party on a passive basis are being transferred to Ignis Asset Management in 2010 where they will be managed on an active basis. The Board is confident this will enhance policyholder returns, and will also benefit owners as the Group moves to managing the assets on a single platform on a consistent basis.
Third party inflows were £1.3 billion in the year mainly reflecting strong sales in retail products and liquidity funds on the back of improving market sentiment and strong investment performance. The liquidity fund outperformed the Institutional Money Market Funds Association (“IMMFA”) sector by 57 basis points achieving a gross total return of 1.63 percent over 2009.
Economic variances on non covered business The economic variances on non-covered business of £245 million before tax primarily relates to the increase in the market value of listed debt issued by the Group’s subsidiary Pearl Group Holdings (No. 1) Limited and Phoenix Group Holdings’ warrants, which reduced MCEV earnings by £169 million and £51 million respectively. In addition, the economic variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to its capital injection into the Pearl businesses. Having reduced its euro cash holdings, Phoenix Group Holdings’ exposure to foreign exchange fluctuations has reduced.
– £44 million of acquisition related expenditure incurred by Phoenix Group Holdings subsidiaries A charge of £ – 78 million after tax as a consequence of the restructuring of the Pearl businesses’ external debt which reduced the expected tax attributes available to the Group to relieve the tax on the emerging surpluses from the operating businesses A charge – of £12 million after tax related to the court-approved Guaranteed Annuity Option Compromise Scheme for Phoenix & London Assurance. This removed longevity risk from the business whilst providing policyholder benefit enhancements Offset by a profit of £102 million after tax as a result of reassessing the – impairment of a loan made to the Phoenix & London Assurance long-term fund. The improved recoverability of the loan reflects the outcome of risk management activity within Phoenix & London Assurance and the improved financial position of the fund.
Debt finance costs include interest of £142 million on the holding company debt for the eight-month period prior to the refinancing (as discussed above) and interest on the refinanced debt on amended terms thereafter of £34 million for the final four-month period.
Tax on non-operating earnings Tax on non-operating earnings includes £199 million of tax relating to economic variances and non-recurring items related to covered business.
31 December 2009 MCEV The Group MCEV increased by £783 million over the year to £1,827 million at 31 December 2009. The increase was mainly due to MCEV profits generated in the year, as discussed above, of £551 million, capital movements of £290 million offset by other comprehensive income items of £58 million.
Removal of PVFP on non-covered business Asset management and management service companies have been excluded from the definition of covered business. Under CFO Forum principles and guidance productivity gains should not be recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management services companies, it would not provide a fair reflection of the Group’s financial position. These companies are therefore reported alongside the Group’s other non-life Group companies at their IFRS net asset value.
This performance demonstrates the strength of the Group’s run-off business model: £ million
(pro forma)* IFRS operating profit Phoenix Life 285 469 Ignis Asset Management 14 34 Corporate costs (17) (46) Operating profit before tax2 282 457 * Includes 12 months of results of the Pearl businesses
The life funds’ performance benefited from improving market conditions, narrowing credit spreads, several planned management actions and improving non-economic experience throughout the year.
Ignis Asset Management’s performance was favourable throughout the year generating a pro forma IFRS operating profit before tax of £34 million. The post acquisition period reflects the recovery in corporate bonds and equity markets.
The following commentary focuses on the reported results of the Group.
The operating profit on with profit funds where internal capital support has been provided was £30 million in the four-month post-acquisition period. The operating profit benefited from the impact of several management actions and harmonisation of longevity improvement factors across the Group and using updated industry tables. These favourable impacts were partially offset by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
The operating profit for management services of £17 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.
Continued improvements in market conditions in the second half of 2009 had a positive impact on the results of the combined asset management business. Ignis Asset Management recorded an operating profit of £14 million in the four-month post-acquisition period.
Corporate costs Corporate office costs and project spend amounted to £8 million. The balance of the charge relates primarily to the net expected return on the pension scheme and share-based payment charges on warrants issued.
Operating profit before adjusting items 282 Investment return variances and economic assumption changes on long-term business 145 Variances on owners’ funds (70) Amortisation of acquired in-force business and other intangibles (52) Non-recurring items (105) Profit before finance costs attributable to owners 200 Finance costs attributable to owners (49) Profit before tax attributable to owners 151 Tax attributable to owners (16) Profit for the year attributable to owners 135
Investment return variances and economic assumption changes on long-term business The expected return on investments for both policyholder and owners’ 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 based on market yields on risk-free fixed interest assets at the start of each financial year. Margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties. The principal assumptions underlying the calculation of the longer term investment return are set out in note 5 to the IFRS financial statements.
Variances on owners’ funds The unfavourable variances on owners’ funds of £70 million for the four months ended 31 December 2009 primarily relates to the increase in the fair value of the Phoenix Group Holdings’ warrants which are accounted for as a financial liability. In addition the variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to the acquisition of the Pearl businesses.
The acquired in-force business is being amortised in line with the run-off of the acquired businesses. Amortisation of acquired in-force business during the period totalled £45 million. Amortisation of other intangible assets totalled £7 million in the period.
Debt finance costs1 34 Other finance costs 15 Finance costs attributable to owners 49 1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest)
Tax attributable to owners The Group tax charge for the year attributable to owners is £16 million. This represents an effective tax rate of 11 percent on profits (after policyholder tax) of £151 million.
The Company is exempt from tax in the Cayman Islands on any profits, income and gains for a period of 20 years from 15 January 2008. Consequently no tax was due from the Company in 2008 or 2009.
As a result of tax losses brought forward and the losses realised by NPL in the year, the Group is not expected to pay any shareholder tax in 2009 and has significant excess tax losses and expenses at the end of the year which have not been recognised in full.
The capital policy of each Group holding company is set by the Board of Phoenix Group Holdings and monitored each month at both executive and Board level. The policies ensure sufficient liquidity to meet creditor obligations and dividend expectations through the combination of cash buffers and strong cash flows from the Group’s operating companies. Volatility in the latter is monitored at the executive and Board level through stress and scenario testing. Where cash flow volatility is judged to be in excess of the Board’s risk appetite, de-risking activities are undertaken.
The capital policy of each life company is set by each life company board and monitored on a daily basis. 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 Group’s IGD assessment is made at the highest EEA level insurance group holding company, which is PLHL. PLHL is a subsidiary of Phoenix Group Holdings.
Group capital resources (“GCR”) 5.0 Group capital resource requirement (“GCRR”) (3.8) IGD surplus 1.2
The estimated IGD surplus has increased by over £0.5 billion from 1 January 2009 to £1.2 billion at 31 December 2009. The estimated IGD surplus at 31 December 2009 represents 132 percent coverage of regulatory requirements, compared to an operating target of 125 percent. The key drivers of the improved solvency position are: As a consequence of the – acquisition of the Pearl businesses £0.45 billion of additional capital was provided to the business operations. This improved estimated IGD surplus by approximately £0.4 billion Surplus transfers – from non profit funds and other capital generation items improved estimated IGD surplus by approximately £0.2 billion. Following individual guidance from the FSA, the IGD surplus includes established surpluses in the non profit funds of UK life and pensions business which are available for transfer to shareholders. This improved the estimated IGD surplus by approximately £52 million which is included within the £0.2 billion
 Estimated IGD surplus has increased by over £0.5 billion in the year.
Estimated IGD surplus £1.22 (132% margin) Estimated IGD surplus following a 20 percent fall in equity markets £1.21 (144% margin) Estimated IGD surplus following a 15 percent fall in property values £1.21 (134% margin) Estimated IGD surplus following a 75bps parallel decrease in yields £1.23 (131% margin) Estimated IGD surplus following credit spread widening1 £1.12 (131% margin) Estimated IGD surplus following a combined 20 percent fall in equity markets, 15 percent fall in property, 75 bps fall in yields and credit spreads widening1 £1.14 (144% margin)
Solvency II Solvency II represents a new solvency framework for EU insurers that will replace all existing prudential regulation including Solvency I, Realistic Balance Sheets, ICA and the IGD. It is expected to come into force on 31 October 2012 and comprises a three-pillar approach that includes a formulaic minimum capital requirement (similar to the current ICA regime), supervisory review of the Group’s own risk assessment and prescribed disclosure requirements.
Solvency II was adopted in the European Parliament on 22 April 2009 and the high level principles agreed in the “Level 1 Framework Directive” on 5 May 2009. The Committee of European Insurance and Occupational Pensions Supervisors (“CEIOPS”) is currently consulting with the industry on the technical specifications of the formulaic capital requirements.
The Group expects Solvency II to result in an improved understanding of the link between risk and capital management and welcomes the increased focus on risk management that Solvency II will bring. The Group is concerned however, that the recent final advice from CEIOPS is more prudent than the Level 1 Framework Directive and more onerous than the existing Pillar 2 regime, in particular for annuity business. As currently drafted, the technical specifications would result in a significant increase in the capital requirements of the industry and the Group is currently working with the Association of British Insurers (“ABI”) and other UK insurers through membership of the ABI’s Solvency II working group with a view to ensuring that the final specifications are appropriate for the UK insurance market.
Risk management Risk management is an essential part of the Group’s strategic agenda. The Board seeks to ensure that the Group understands and manages its risks accordingly; to either create additional value for its stakeholders or to mitigate any potentially adverse effects.
A risk framework is in place which seeks to establish a coherent and interactive set of risk management arrangements comprising formal committees, risk review functions, risk management policies and risk assessment processes. This framework allows informed decisions to be made by the relevant statutory and regulated entity boards and senior management. The framework defines how risks taken by the Group are managed and mitigated ensuring that initiatives are not evaluated purely in terms of the potential returns, but also in terms of the range of potential outcomes which may arise and their relative likelihood. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of management’s approach to risk management is being performed.
Each committee has formal terms of reference which are approved by the relevant divisional group executive team. Overall reporting of risk management and escalation of emerging issues is undertaken through divisional management committees to ExCo and reported to the PLHL and Group Boards.
Risk management is an evolving landscape and developments to augment risk culture and governance across the Group will continue. Actions taken recently include the appointment of a Group Chief Risk Officer in November 2009, the establishment of a Phoenix Group Holdings Board Risk Committee in early 2010 and improvements in consolidated risk reporting in line with current best practice. The Group sees these enhancements as key to supporting further strengthening of the Group’s risk culture and maintaining it in line with current best practice guidelines.
Risk management framework overview The Group’s risk management framework is underpinned by its governance model which includes statutory boards, management boards, risk policies, oversight committees and established governance functions.
Three Lines of Defence The Group operates a Three Lines of Defence model: First line: management of risk is delegated from the Group Board to the – Group Chief Executive, PLHL Board and its ExCo members and through to divisional business managers Second Line: risk oversight is provided by the Group’s divisional risk – and compliance functions and established oversight committees Third line: independent verification of the adequacy and effectiveness – of the internal risk and control management systems is provided by Board Audit Committees. The Board Audit Committees are supported by the Group Internal Audit function.
Risk appetite The Phoenix Group risk appetite framework consists of a set of statements that articulate the risk appetite of the Group Board with respect to policyholder security, earnings volatility, liquidity and regulatory compliance.
A range of high level metrics and reporting mechanisms is in place to monitor risk appetite across the Group. Breaches of appetite are corrected through management action when appropriate.
Further development work is underway to establish risk appetite limits and trigger points in terms of capital and earnings impact, and ensure that such limits are aligned with capital resources and owner expectations.
Risk assessment processes The Group has a standardised assessment framework for the identification and assessment of the different types of risk it may be exposed to and how much capital should be held in relation to those exposures. This framework is applicable across the Group as a whole and establishes a basis of consistency not only for the approach to risk assessment, management and reporting processes but also for determining and embedding capital management at all levels of the Group.
Risk review functions Group and the divisional operating units’ risk functions provide oversight of the risk management processes across the Group. A central risk function is being created with responsibility for the oversight of the risk management framework, policy and standards across the Group. Risk review functions in each of the business units manage the framework in line with these standards. Their responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of the impact of these changes on risks to business and the monitoring of the mitigating actions. The risk functions also ensure that divisional risk committees are provided with meaningful risk reports and that there is appropriate information to assess risks.
The policies define: T – he Group’s methods for the identification of risk and its interpretation R – equired structures to ensure the appropriate quality and diversification of assets in the context of the liabilities T – he Group’s approach to ensuring that its customers are treated fairly R – eporting requirements.
In times of extreme market turbulence, the Group may not have sufficient liquid assets to meet its payment obligations or may suffer a loss in value.
The Group undertakes regular monitoring activities in relation to market risk exposure, including the monitoring of asset mixes, cash flow forecasting and stress and scenario testing. In response to this, the Group may implement de-risking strategies to mitigate against unwanted outcomes. The Group also maintains cash buffers at the holding company level to reduce reliance on emerging cash flows.
Significant counterparty failure. 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 is well positioned to be the natural consolidator for closed funds and although there are no immediate plans for further acquisitions the Group continually monitors market developments.
8p A more detailed analysis of the Group’s inherent exposures to key financial and insurance risks, including the Group’s specific objectives and policies for managing its market, credit, liquidity and insurance risks are set out at note 42 to the Financial Statements.
46 Building trust through corporate responsibility 46 Workplace 49 Marketplace 50 Community 51 Environment
Corporate responsibility The value of our organisation is directly related to the trust our stakeholders have in the integrity and sustainability of our business model
In strategic terms, a responsible management approach to non-financial issues such as customer service and employee engagement will directly affect our ability to succeed. Investment in corporate responsibility therefore represents a significant opportunity for our business, creating value through enhanced stakeholder trust in our business.
Issues of interest to our stakeholders, many of which are important non-financial opportunities or risks, can be grouped around four areas: – Workplace – our employees and how we attract, develop and retain the best talent – Marketplace – governance and risk management, our customers, owners and other investors/suppliers of capital, our outsourcers and other business partners and suppliers of goods and services, regulators, legislators and the media
– Environment – our responsibilities to take account and mitigate, as relevant and appropriate to the nature and scale of our business, our environmental footprint.
Governance of workplace issues Our employee policies and practices are designed to meet the needs of our employees, the business, the regulatory environment and the expectations of stakeholders, including policyholders and owners. The Group’s strategy towards its employees is to ‘enable the organisation to optimise the contribution of its employees’. At the heart of this strategy is the commitment to create an environment in which all our employees have high levels of engagement and so feel able to contribute to and share in the future success of the business.
In the context of the Workplace, key policies and practices include: – A Performance Management System to assess the competence of all our employees, including Approved Persons, in order to remain compliant with FSA regulations, deliver effective business performance and encourage our employees to grasp career opportunities and behave at work in a manner consistent with our values
Outcomes for 2009 Employee Engagement Survey A survey was carried out across all parts of the Group (excluding Ignis Asset Management) in order to measure and assess engagement levels and gather feedback from our employees. An overall internal “Engagement Index” score of 60 percent was achieved, which was very encouraging in the context of a first survey and the challenging market and economic conditions. This is a good foundation on which to build and we aim to achieve industry benchmark standards in coming years.
These challenges have necessitated some difficult decisions regarding our employees and the need to reposition the Group in terms of organisational infrastructure and looking forward to the changing cost/income dynamics of our business. On top of this, as a major insurance industry “consolidator”, the Group constantly looks at ways to improve service and financial returns to our customers; this inevitably, on occasions, necessitates organisational restructuring.
As part of this ongoing programme of service improvement, the Group’s life office in Glasgow and its Peterborough site are being closed and operations consolidated in Wythall, where new job opportunities are being provided and investment made to improve and enhance the offices and general working environment. We are very pleased that over 50 of our employees have so far relocated to Wythall. It has been necessary to make redundancies in Glasgow and Peterborough; the Group’s approach to redundancies is to provide support which exceeds statutory requirements, which both helps affected employees and minimises the impact on the morale of those employees remaining.
This includes: – Undertaking full consultation through our recognised trade unions or elected consultative groups – Providing enhanced redundancy terms – Providing appropriate counselling support and – Offering every one of our employees leaving through redundancy, a career plan and appropriate development through our “Next Steps” programme delivered in partnership with external providers.
Performance indicators The Human Resources function monitors numerous employee metrics (employees being our key non-financial risk) and reports in comparison to previous years. This enables analysis of year-on-year employee trends and performance against comparable companies.
In 2009, annual employee turnover (employees choosing to leave voluntarily) was 3.8 percent (2008: 5.8 percent1). Annual new starter turnover (number of employees leaving voluntarily within 12 months of starting) was 7.3 percent (2008: 10.3 percent1). The percentage of days lost through sickness was 1.6 percent (2008: 1.5 percent1). The percentage of employees sponsored on a Professional Qualification was 21.1 percent (the comparable amount for 2008 is not available).
Future plans – Repeat the employee engagement survey on a Group-wide basis – For those parts of the business covered by the 2009 survey, work toward an engagement index score of 70 percent and aim to bring the survey scores further into line with industry benchmarks where we did not do so well
– Further roll out and continuously update the “Business Ethics” training module, in the context of the emerging priorities and regulation of our business
– Consider the implications of the forthcoming Bribery and Corruption Bill on our suite of regulatory training programmes
– Consider which organisations we should be members of to share, learn and receive feedback on our programmes.
The open description and reporting of our Governance and Risk Management architecture is fundamental to the interests of investors and customers.
Our Customer Services teams are focused on establishing and maintaining appropriate standards of service provided by our outsource partners. These standards are contracted through a sophisticated structure of service level agreements and monitored through regular reporting and key performance indicators which report to and are monitored by senior management. We have put processes in place that enable us to elevate significant issues quickly to senior management.
The Group supports industry-led initiatives. An example of this is the ABI sponsored initiative Origo Options, the aim of which is to speed up processing times for customers wishing to take an open market option. Moving forward, we intend to extend this service to pension-to-pension transfer transactions to ensure that our customers benefit from a more efficient and faster process. In an industry where market conditions fluctuate, this will mean that our customers have greater control over their money. We also continue to participate in the ABI Customer Impact Scheme and support its customer commitments which are relevant to our business.
ABI Customer Impact Scheme The results of our participation in the scheme were helpful in focusing where we are doing well and where we are not doing so well.
Whilst we are pleased that there has been an increase in our “excellent” and “very good” service scores, the percentage of customers rating their experience as poor remained the same as in the previous year. This is something we are aiming to improve.
“Our marketplace is where we work to achieve the best possible outcomes for our customers. Our aim is to provide a safe home for customers’ policies – with great care and intelligence applied to protecting and enhancing value wherever possible.” Mike Merrick Chief Executive, Phoenix Life
Suppliers Continued progress has been made during 2009 in the implementation of our outsource strategy. This will enable the Group to budget more effectively as we have aligned the cost to run-off policies at competitive contractually agreed rates.
Future plans – Complete the roll out of the procurement policy throughout the Group – Consider those elements of our Corporate Responsibility programmes which should be aligned with supplier engagement and management – Manage procurement in a consistent manner using best practices, working within a structured compliance and governance framework – Identify key measures for this area of our activities.
Donations* During the year a total of £91,786 was donated by the Group for charitable purposes. This included donations in recognition of employees giving their time to volunteer for charities, matching money raised through employee fundraising efforts, as well as small donations in response to requests from a number of national charities and those based close to the Group’s sites.
Future plans – Review our community focus and strategy, including proactively selecting categories of charities to be considered for direct donations – Identify key measures for this area of our activities.
Environment Overview Our impacts are not significant in scale, but good environmental practice at any level is valuable and is of increasing interest to our stakeholders.
Management of environmental issues Whilst we have some way to go, we have made encouraging progress in providing an effective recycling infrastructure at our main sites.
For more information on the Group’s Corporate Responsibility programme, please visit the Corporate Responsibility section of the Group’s website at www.thephoenixgroup.com
 Good environmental practice is of increasing interest to our stakeholders, particularly our employees.
 From left to right: Ron Sandler Jonathan Moss Simon Smith Ian Cormack Alistair Lyons Ian Ashken David Woods Tom Cross Brown Manjit Dale Hugh Osmond David Barnes Charles Clarke Rene Pierre Azria Isabel Hudson 54 Phoenix Group Holdings Annual Report & Accounts 2009
Ian Ashken (age 49) Non-Executive Director Ian Ashken is Vice Chairman and Chief Financial Officer of Jarden Corporation, a NYSE listed Fortune 500 U.S. diversified consumer products company. 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 currently serves as an independent Director and head of the Audit Committee of GLG Partners, Inc. Mr Ashken is also a Principal and Executive Officer of a number of private investment entities. Mr Ashken was appointed to the Board of Directors of the Company on 2 September 2009.
David Woods (age 62) Non-Executive Director & Risk Committee Chairman David Woods was appointed non-executive Chairman of Royal Liver Assurance in March 2003 and Director of Standard Life UK Smaller Companies Trust PLC in May 2005. He is a Non-Executive Director of Murray Income Trust plc and of The Moller Centre for Continuing Education. He is also Chairman of the Pension Fund Trustees for all the UK companies in the Steria Group and a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group. Mr Woods was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
Transactions On 29 June 2009, the Company announced that it had agreed to acquire a group of businesses that specialise in the consolidation and management of closed life and pension funds, referred to in this Annual Report and Accounts as the Pearl businesses.
The acquisition of the Pearl businesses was approved by shareholders on 24 July 2009 and the acquisition was completed on 2 September 2009. Information about the acquisition is given in note 3 to the IFRS financial statements.
Information about the principal activities and strategy of the Company and the Group as a whole is presented in the Business and Strategy section on pages 10 to 15.
Details of the Group’s approach towards its employees and other stakeholders are presented in the Corporate responsibility section on pages 46 to 51.
Events which have taken place following the end of the reporting period are disclosed in note 48 to the IFRS financial statements.
Financial instruments The Group is exposed to financial risk through its financial assets, financial liabilities and policyholder liabilities. The key financial risk factors that affect the Group include credit risk, market risk and liquidity risk.
Information on the Group’s exposure to these risks and the risk management approaches and methodologies applied to these risks is presented in note 42 to the IFRS financial statements.
Market value of land and buildings As at the date of preparation of the statement of consolidated financial position, there was not a significant difference between the market value of land and buildings owned by the Company or any of its subsidiaries and the carrying value of these assets in the statement of consolidated financial position.
Information on the Company’s dividend policy is provided in the Group Chief Executive’s Report on page 7.
Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Performance review on pages 18 to 43. The Performance review includes sections on the Group’s performance (including cash generation), Capital management and Risk management. In addition, notes 41 and 42 to the IFRS financial statements include the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk.
Jonathan Evans was appointed as Chairman on 2 September 2009 and resigned from this position on 24 September 2009. He resigned as a Director on 22 October 2009.
Ron Sandler was appointed as a Director and Chairman on 24 September 2009 and Tom Cross Brown was also appointed as a Director on that date.
In addition, Charles Clarke, Isabel Hudson and David Woods were appointed as Directors on 18 February 2010 and Alastair Lyons was appointed as a Director on 29 March 2010.
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 this Directors’ Report, the Remuneration report and in note 45 to the IFRS Financial Statements.
The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under Article 3 and the Company is authorised to make purchases of its own shares under Article 8.2 and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Law (2009 revision) of the Cayman Islands including out of capital.
The deed of indemnity remains in force as at the date of signature of this Directors’ Report.
Directors’ conflicts of interest The Board has established procedures for handling conflicts of interest in accordance with Cayman Islands company law and the Company’s Articles.
All Directors and employees of the Company and its subsidiaries are subject to the Group Conflicts of Interest Policy which has been established to provide a clear framework for an effective system of internal control to manage conflicts of interest throughout the Group.
Directors’ & Officers’ liability insurance The Company maintains Directors’ & Officers’ liability insurance cover which is reviewed annually.
Memorandum and articles of association Changes to the Company’s Memorandum and Articles require prior shareholder approval and, in some cases, the approval of the Group’s lending banks.
Subject to the provisions set out in Article 7 of the Company’s Articles and, where applicable, the rules of the book-entry and settlement system operated by Euroclear Nederland, the Company’s shares are transferable.
Political donations The Company and its subsidiaries have not and do not intend to make donations to political parties or independent election candidates nor have they made or intend to make any donations to EU political organisations or incur EU political expenditure.
AGM It is the intention of the Company to hold an AGM each year. The next AGM will be held on Wednesday 23 June 2010. A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting.
Ernst & Young Accountants LLP have indicated their willingness to continue in office as auditors of the Company and a resolution proposing their reappointment will be put to the AGM.
Company Secretary Gerald Watson was appointed as Company Secretary of the Company on 2 September 2009.
The Board The Board comprises the Non-Executive Chairman, the Group Chief Executive, the Group Finance Director and 11 other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 54 to 57. The Board considers that the following Directors are independent as they do not have any interest or business or other relationship which could, or could reasonably be perceived to, interfere materially with their ability to act in the best interests of the Company: David Barnes, Charles Clarke, Ian Cormack, Tom Cross Brown, Isabel Hudson, Alastair Lyons and David Woods. The Board has considered the criteria proposed by the Combined Code in assessing the independence of the Directors.
Non-Executive Directors are appointed for a term of three years, and any subsequent terms are considered by the Nomination Committee. The remuneration of the Directors is shown in the Remuneration report on pages 68 to 73. The terms and conditions of appointment of Non-Executive Directors are on the Company’s website. All Directors will be subject to a vote for re-election at the Company’s first Annual General Meeting in June 2010.
All the Directors of the Company are FSA Approved Persons in respect of the Company’s FSA-regulated subsidiaries.
Operation of the Board The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and emergency Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. The Board is scheduled to meet nine times in 2010 including a two-day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will continue to hold meetings with the Chairman without the Executive Directors being present.
Audit Committee Alastair Lyons is the Chairman of the Audit Committee. The other members are David Barnes and Charles Clarke. The Chairman of 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. The Audit Committee was established on 29 March 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Audit Committee is scheduled to meet five times in 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 are provided in the Directors’ Remuneration report on pages 68 to 73.
Hewitt New Bridge Street, the Company’s remuneration consultants, provide advice to the Remuneration Committee.
Risk Committee 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.”
David Woods is the Chairman of the Risk Committee. The other members are Rene-Pierre Azria, Tom Cross Brown, Isabel Hudson and Hugh Osmond. The Risk Committee was established on 26 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Risk Committee is scheduled to meet five times in 2010.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board’s overall degree of risk aversion, the current financial situation of the Company and, drawing on assessment by the Audit Committee, the Company’s capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters but does not extend into operational matters which are for the executive within the overall risk framework determined by the Board.
Investor Relations The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. There is a regular dialogue with institutional shareholders through meetings held on a regular basis. The Chairman and Executive Directors are available to meet institutional investors, fund managers and analysts when required. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed. Board members regularly receive copies of the latest analysts and brokers reports on the Company and the sector to further develop their knowledge and understanding of external views about the Company.
The Board regards the AGM as a valuable opportunity to communicate with its shareholders. At the meeting, the Company intends to comply with the Combined Code as it relates to voting including the separating of resolutions. Shareholders are invited to ask questions during the meeting and have an opportunity to meet with the Directors following the conclusion of the formal part of the meeting. In line with the Combined Code details of proxy voting by shareholders are made available at the meeting and are posted on the Company’s website following the meeting.
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 2009 (refer to page 76).
The Board (and its subsidiary company Boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. In accordance with the Combined Code, the Board intends to undertake a review of internal controls prior to its approval of next year’s Annual Report and Accounts. The Group’s approach to risk management is contained on pages 40 to 43.
The Remuneration Committee is responsible for making recommendations to the Board on the Group’s remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Group Chairman, Executive Directors, members of ExCo and other senior managers in the Group.
As the company is incorporated in the Cayman Islands and currently has a Standard Listing on the Official List, the Company is not required to provide information contained in this Remuneration report in accordance with the UK Companies Act 2006. However, in line with its intention to seek a Premium Listing and the enhanced level of disclosure that will entail, the Company has sought to comply with these provisions voluntarily.
Remuneration Committee The Board Remuneration Committee was formed in February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Chairman of the Remuneration Committee is Ian Cormack. The other members of the Committee are David Barnes and Isabel Hudson. The Group Chairman, Group Chief Executive and Group Human Resources Director are invited to attend meetings but are not present when their own remuneration is discussed.
In light of the above policy, and following a detailed benchmarking exercise, Executive Directors’ base salaries have been increased with effect from 1 January 2010, and maximum (and target) bonus potential has been reduced for 2010, so that these elements of the package, and the structure of packages more generally, better reflect the market.
An annual bonus scheme is operated for all employees including executives and senior managers, (other than for Ignis Asset Management). Payment of annual bonuses is dependent upon performance against embedded value, internal cost control and risk management targets, together with business-aligned challenging personal targets. Within Ignis Asset Management, separate annual bonus arrangements are in place, which are subject to review and approval by the Remuneration Committee.
Long-term incentives are provided through the Long-Term Incentive Plan (“LTIP”) which is designed to ensure that Executive Directors and other senior executives focus effort on those performance measures of greatest relevance to the Group and are appropriately retained. Participants receive awards of conditional shares in the Group which normally vest three years after they are awarded, subject to the satisfaction of performance conditions and continued service. The Group operates a separate LTIP for senior executives within Ignis Asset Management which focuses on growth in the value of the asset management business.
The Group also introduced and operated the Bonus Share Plan (“BSP”) during 2009 which was designed to reward Executive Directors and senior executives for their efforts and performance with respect to the capital reorganisation in the second half of the year. There is no intention to grant further BSP awards given that the LTIP will be the primary long-term incentive vehicle going forward.
Pension benefits are provided to all employees, including the Executive Directors, via defined contribution or defined benefit pension schemes, with the latter now closed to new entrants. Annual bonuses and long-term incentives are non-pensionable, save for a pensionable bonus element in the Pearl Group Staff Pension Scheme, for which only members of the Money Purchase (and hybrid) sections of the scheme are eligible.
Non-Executive Directors Determination of the remuneration of Non-Executive Directors remains a matter for the whole Board (with the Non-Executive Directors absenting themselves) in accordance with the Articles. The only exception to this is the setting of the expense claim policy which is delegated to the Remuneration Committee to consider.
Executive Directors Service agreements On 2 September 2009, Jonathan Moss, Group Chief Executive and Simon Smith, Group Finance Director were both appointed to the Board of Directors. There are no other Executive Directors. Jonathan Moss has a service agreement dated 5 February 2010 and Simon Smith has a service agreement dated 30 March 2005.
Base salary and benefits At the beginning of 2009, the Board of the former Pearl Group Limited determined that base salaries should not be increased for Executive Directors.
With effect from 1 January 2010, the Remuneration Committee approved increases in the base annual salaries of the Group Chief Executive to £650,000 (from £400,000) and for the Group Finance Director to £400,000 (from £380,000). These increases follow a review of remuneration arrangements which included a detailed assessment of base salary levels in the life assurance sector and listed environment more generally and have been accompanied by a reduction in the value of bonus potential to better align packages to market levels following the adoption of a market consistent remuneration policy.
The Executive Directors’ remuneration includes a non-pensionable car allowance which is paid monthly. Non-pensionable benefits-in-kind also include private medical insurance, income protection and life assurance.
The business performance targets and relative weightings were recommended by ExCo to the Board and applied to all employees, including the Executive Directors and the remaining members of ExCo. A corporate “multiplier” of 1.02 percent was then calculated, reflecting actual Group performance in 2009 against each of the targets (with 1.0 reflecting an overall “on target” performance and 2.0 being the maximum multiplier which can be applied where the “stretch” target is exceeded in each of the three measures). Actual bonus amounts were finally determined by a combination of the “multiplier” and personal performance ratings.
In addition to the above, the Remuneration Committee of the former Pearl Group Limited awarded bonuses to the Group Chief Executive and the Group Finance Director following the successful achievement of a wide range of strategic and operational activities. Details of these payments, together with those determined by the combination of the “multiplier” and personal performance ratings referred to above, are set out in the emoluments table on page 73.
The same performance measures and relative weighting as between those measures will be applied in 2010 as were applied in 2009, with actual targets reflecting achievement of the 2010 Group plans.
Jonathan Moss 112,500 112,500 Simon Smith 100,000 100,000 1 Both the LTIP and BSP awards were granted on 21 September 2009 2 LTIP awards will automatically vest after three years and once the Premium Listing on the LSE has been attained 3 The BSP awards have no performance conditions attached and have a vesting period, as detailed within the Rules of the Scheme, of two years from grant 4 Both the LTIP and BSP awards are considered as conditional share awards
In respect of LTIP awards to be granted in 2010, it is envisaged that the Executive Directors will each receive an award over shares worth 200 percent of salary with performance targets based predominantly on Group MCEV, being the performance metric considered by the Remuneration Committee to be the most appropriate measure of long-term Group performance with which to reward senior executives. The actual performance target(s) have yet to be finalised but will be appropriately challenging and disclosed in next year’s Remuneration report.
Pension entitlement Jonathan Moss is a member of the Money Purchase Section (defined contribution) of the Pearl Group Staff Pension Scheme and receives a Group contribution of 11.7 percent of salary up to a maximum earnings limit (currently £123,600). For the period from 2 September 2009 until 31 December 2009, £4,820 was paid into his money purchase account.
Directors’ interests The interests of the Directors (including family interests) in Phoenix Group Holdings ordinary shares1 both during the year ending 31 December 2009 and up to 30 March 2010, were as follows: As at 1 January 2009 or date of appointment if later
As at 31 December 2009 and 30 March 2010 or date of leaving if earlier
Dimitri Goulandris7 (resigned 2 September 2009) 63,600 66,667 Jonathan Moss (appointed 2 September 2009) 33,989* 33,989* Miguel Paes do Amaral7 (resigned 2 September 2009) 63,600 66,667 Ron Sandler5 (appointed 24 September 2009) – – Simon Smith (appointed 2 September 2009) 32,200* 32,200* Hugh Osmond (appointed 2 September 2009) 703,616* 717,1666* Ashley Silverton (resigned 2 September 2009) – – 1 Disclosures presented above primarily represent Phoenix Group Holdings ordinary shares, except for holdings of ‘B’ ordinary shares which are marked*. Any warrant holdings are disclosed within the respective footnote.
2 Represents securities held indirectly by Nicolas Berggruen through Berggruen Acquisitions Holdings II Ltd. Nicolas Berggruen did not hold any securities of Phoenix Group
5 As announced previously, Ron Sandler is entitled, under his letter of appointment, to an award of 300,000 Phoenix Group Holdings ‘B’ ordinary shares. In line with this agreement, Ron Sandler will receive 177,000 shares (i.e. the net of tax value, with the Group settling the relevant taxes) prior to the Premium Listing.
6 Hugh Osmond is a beneficial shareholder of Xercise Limited. Xercise Limited has contingent rights in respect of a further 9,180,660 shares. Details of Xercise Limited’s interests can be found within the Directors Report.
8 Ian Ashken does not hold any shares in Phoenix Group Holdings directly although he is a member of Marlin Equities IV, LLC. M E Franklin disclosed a significant interest in the Company through Marlin Equities IV, LLC details of which can be found within the Directors’ report.
Directors remaining in service until the date the payments were made. These cash payments were made on 22 March 2010. 13 For the period from 2 September to 12 December 2009, TDR Capital were paid fees as disclosed under the “Related Party transaction” note. 14 For the period from 2 September to 12 December 2009, Hugh Osmond received under a Transitional Services Agreement, fees of £121,401. 15 As set out in the Proxy Statement issued to shareholders in July 2009, Mr Silverton received £8,851 in fees and in addition, received £562,924 as a result of the consummation of the acquisition of the Pearl businesses on 2 September 2009. 16 Fees to these Non-Executive Directors include amounts due to them for service on the Boards of subsidiary companies.
During 2008, with regard to Phoenix Group Holdings, none of the Directors received any remuneration.
Signed on behalf of the Board of Directors by the Chairman of the Remuneration Committee
IFRS financial statements Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009
Board Responsibility Statement according to Section 5:25c(2)(c) of the Dutch Financial Markets Supervision Act.
Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2009 which are part of the financial statements of Phoenix Group Holdings, Cayman Islands, which comprise the statement of consolidated financial position as at 31 December 2009, the consolidated income statement, the statement of consolidated comprehensive income, the analysis of pro forma profit reconciliation of Group operating profit to profit before the tax attributable to owners, the statement of consolidated cash flows and the statement of consolidated changes in equity for the year then ended and a summary of significant accounting policies and other explanatory notes.
Directors’ responsibility The Directors are responsible for the preparation and fair presentation of the 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. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation 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 In our opinion, the consolidated financial statements give a true and fair view of the financial position of Phoenix Group Holdings as at 31 December 2009, 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.
Report on other legal and regulatory requirements Pursuant to the legal requirement under 2:393 sub 5 part f of the Netherlands Civil Code, we report, to the extent of our competence, that the Directors’ report is consistent with the consolidated financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
Finance costs 12 (87) – Profit for the year before tax 91 31
Tax attributable to policyholders’ returns 13 60 – Profit before the tax attributable to owners 151 31
Tax credit 13 44 – Less: tax attributable to policyholders’ returns 13 (60) – Tax attributable to owners 13 (16) – Profit for the year attributable to owners 135 31
Earnings per ordinary share Basic earnings per ordinary share 15 102.9p 58.1p Diluted earnings per ordinary share 15 89.8p 45.1p
Other comprehensive income: Actuarial gains of defined benefit pension schemes 105 – Exchange differences on translating foreign operations (40) 133
Attributable to: Owners of the parent 129 164 Non-controlling interests 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.
Pro forma reconciliation of Group operating profit to profit before the tax attributable to owners for the year ended 31 December 2009
Operating profit Phoenix Life 285 – Ignis Asset Management 14 –
299 – Corporate costs (17) (2) Total operating profit/(loss) before adjusting items 4.2 282 (2)
Investment return variances and economic assumption changes on long-term business 5 145 – Variance on owners’ funds 5 (70) 33 Amortisation of acquired in-force business (45) – Amortisation of other intangible assets (7) – Non-recurring items 4.2 (105) –
Equity attributable to owners of the parent Share capital 16 – – Share premium 859 401 Other reserves 257 6 Shares held by employee trust 17 (4) – Foreign currency translation reserve 93 133 Retained earnings 207 33
Total equity and liabilities 76,936 593 80 Phoenix Group Holdings Annual Report & Accounts 2009
Intangible assets Goodwill 77 – Acquired in-force business 2,163 – Customer relationships 438 – Present value of future profits 35 –
Cash flows from investing activities On acquisition of the Pearl businesses 40 6,146 – Interest received 2 16 Net change in cash invested in trust account 591 (457)
Cash flows from financing activities Gross proceeds from issue of share capital – 422 Repayment on redemption of shares (41) – Proceeds from issue of warrants – 31 Cost of issuing shares and warrants – (15) Repurchase of shares from non-controlling interests (3) – Interest paid on borrowings (221) – Proceeds of new borrowings 42 – Dividends paid to non-controlling interests (8) – Repayment of borrowings (110) –
Cash and cash equivalents at the end of the year 39 6,081 2
On acquisition of the Pearl businesses – – – – – – – 699 699
Dividends paid to non-controlling interests – – – – – – – (8) (8)
Statement of consolidated changes in equity – restated for the period ended 31 December 2008
At 2 January 2008 – – – – – – – – – Profit for the period – – – – – 31 31 – 31 Other comprehensive income for the period – – – – 133 – 133 – 133 Total comprehensive income for the period – – – – 133 31 164 – 164
Issue of share capital – 422 – – – – 422 – 422 Capital contribution of Sponsors’ warrants – – 6 – – – 6 – 6 Underwriting fee charged to equity – (20) – – – – (20) – (20) Expenses relating to issuing of shares charged to equity – (1) – – – – (1) – (1) Credit to equity for equity-settled share-based payment – – – – – 2 2 – 2
The consolidated financial statements have been prepared on a historical cost basis except for investment property, owner-occupied property, and those financial assets and financial liabilities that have been measured at fair value.
Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and also in accordance with the statutory provision of Part 9, Book 2, of the Netherlands Civil Code.
The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement more than 12 months after the period end is presented in the notes.
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the consolidated income statement unless required or permitted by an accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group.
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 unitholders. Intragroup balances and income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements.
The Group uses the purchase method to account for the acquisition of subsidiary undertakings. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. Any excess of the fair value of the net assets acquired over the cost of acquisition is credited to the consolidated income statement. Directly attributable acquisition costs are included within the cost of the acquisition, with the exception of costs directly related to the issuing of debt or equity securities which are included within the initial carrying amount of debt or equity securities where these are not carried at fair value.
In 2008, 29.99% of the IPO shares were classified by the Company as a financial liability, ‘ordinary shares subject to possible redemption’ as it was considered that Phoenix Group Holdings had an obligation to give the holders of the redeemable shares cash in exchange for their shares had they not wished to be involved in the consummation of an acquisition that Phoenix Group Holdings was proposing. It is considered that this obligation could have been avoided and therefore the 29.99% of the IPO shares have been reclassified as equity. This restatement has had the effect of increasing share premium by £132 million, increasing retained earnings by £3 million, increasing the foreign currency translation reserve by £41 million, decreasing ordinary shares subject to possible redemption by £172 million and decreasing deferred interest income on shares subject to possible redemption by £4 million.
In 2008, all share premium arising on the issue of share capital and all share issue costs taken to equity were accounted for within other reserves. The comparative amounts for 2008 have been restated to present these figures within a separate share premium account. The effect of this restatement is to increase share premium and decrease other reserves by £401 million.
Change in accounting policy On 2 September 2009 the Company changed its functional currency from euros to sterling as from this date, and as a result of the acquisition of the Pearl businesses, the Company primarily generates and expends cash in sterling. All foreign currency transactions for the Company are now translated into the functional currency using the average rate. Details of the accounting policy with respect to foreign currency transactions are given in note 1(c).
Insurance and investment contract liabilities Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 42.
1. Accounting policies (continued) Fair value of financial assets and liabilities The fair values of financial assets and liabilities are classified and accounted for as set out in accounting policies (r) and (g) respectively. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities, without any deduction for transaction costs. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.
(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.
Some insurance and investment contracts contain a discretionary participation feature (“DPF”). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
For participating business, the Group follows the provisions of the UK Accounting Standard Board’s FRS 27 Life Assurance. In accordance with these requirements, the liabilities under insurance contracts and investment contracts with DPF are calculated on the FSA’s realistic basis. The key aspects of this methodology are: – liabilities to policyholders arising from with profit life assurance business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; – acquisition costs are not deferred; and – reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
Where it is not possible to apportion the future profits on this non participating business to policyholders the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement.
The Group’s accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement.
The valuation of liabilities on unit linked contracts is based on the fair value of the related assets and liabilities. The financial liability is measured based on the carrying value of the assets and liabilities that are held to back the contract. The liability is the sum of the unit linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
– a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management personnel.
Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated above in the financial liabilities accounting policy. Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.
(i) Deposits from reinsurers It is the Group’s practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, the investments are recognised as ‘financial assets’ and the collateral repayable is recognised as ‘deposits received from reinsurers’.
(k) Obligations for repayment of collateral received It is the Group’s practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, the investments are recognised as ‘financial assets’ and the collateral repayable is recognised as ‘obligations for repayment of collateral received’. The ‘obligations for repayment of collateral received’ are measured at amortised cost, which in the case of cash is equivalent to cost.
Defined benefit schemes The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to cash generating units (Phoenix Life and Ignis Asset Management). Goodwill is impaired when the recoverable amount is insufficient to support its carrying value.
Plant and equipment is stated at cost less accumulated depreciation. Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives.
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.
Cash and non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of consolidated financial position within the appropriate asset classification.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
For the diluted earnings per share, the weighted average number of ordinary shares and ‘B’ ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including warrants and potentially issuable ordinary shares.
(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.
– other fees, which are recognised as the services are provided. 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.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method. Dividend income is recognised in the consolidated income statement on the date the right to receive payments is established, which in the case of listed securities is the ex-dividend date.
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.
(z) Share capital and shares held by employee trust Ordinary share capital The Group has issued ordinary shares and ‘B’ ordinary shares each of which is 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 employee trust Where an employee trust acquires the Company’s share capital 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 employee trusts are charged or credited to the own shares account in equity. 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.
In preparing the consolidated financial statements the Group has adopted the following standards, amendments and interpretations: – IFRS 8 Operating Segments. This converges International and US reporting requirements relating to segmental information; – IAS 1 Presentation of Financial Statements (Revised). This revises and enhances the presentation of information in the financial statements; – IAS 27 Consolidated and Separate Financial Statements. This revises the accounting treatment of dividends paid out of the pre-acquisition reserves of subsidiaries; – Share-based Payment: Vesting conditions and cancellations (Amendments to IFRS 2). This results in an immediate acceleration of the expense that would otherwise have been recognised in future periods should an employee decide to stop contributing to the savings plan. The amendment has no impact on the results of the Group; – Improving disclosures about Financial Instruments (Amendments to IFRS 7). This requires enhanced disclosures about fair value measurements and liquidity risk; and
2. Financial information (continued) The International Accounting Standards Board (“IASB”) has issued the following standards, amendments and interpretations which apply from the dates shown. The Group has decided, where permitted, not to adopt any of these standards, amendments or interpretations in advance of their implementation date. The impact of adopting them is not expected to have a material effect on the results of the Group: – IFRS 3 Business Combinations (Revised) (2010). This converges International and US reporting requirements relating to business combinations; – IFRS 9 Financial Instruments (2013). IFRS 9 is the first phase of the project to replace IAS 39 Financial Instruments: Recognition and Measurement and deals with the classification and measurement of financial assets, including some hybrid contracts; – IAS 24 Related Party Disclosures (2011). This amends the definition of a related party and clarifies its intended meaning; – IAS 27 Consolidated and Separate Financial Statements (Revised) (2010). This revises the accounting for non-controlling interests and the loss of control of subsidiaries; – Annual improvements 2009 (2010). This makes a number of minor improvements to existing standards and interpretations; – Embedded Derivatives (Amendments to IFRIC 9 and IAS 39) (2010). This clarifies the treatment of embedded derivatives; and – IFRIC 17 Distributions of Non-Cash Assets to Owners (2010). IFRIC 17 provides guidance on how an entity should account for distributions of non-cash assets to its owners, other than in limited circumstances.
On 2 September 2009, the date of legal completion of the acquisition, certain external debt of the Pearl businesses was restructured, specifically the £905 million Pearl facility, the £2,260 million Impala facility and the Royal London PIK notes and facility. Of the £825 million outstanding under the £905 million Pearl facility, £325 million was assigned to Phoenix Group Holdings in exchange for £75 million consideration, £75 million of the remaining £500 million was converted into two £37.5 million secured C loan notes and the terms of the remaining £425 million were amended. The terms of the £2,260 million Impala facility were also amended. Of the £350 million Royal London PIK notes and facility outstanding (comprising principal and capitalised interest), £250 million was assigned to Phoenix Group Holdings in exchange for the issue to Royal London of 1.5 million ‘B’ ordinary shares and 12.36 million warrants for ‘B’ ordinary shares. The terms of the remaining £100 million PIK notes and facility were then amended. The banks and other lenders involved in this restructuring are collectively known as “the Lenders”.
The restructuring formed an integral part of the acquisition transaction and the effect of the restructuring has been incorporated in determining the fair values of certain liabilities at the acquisition date.
The acquisition has been accounted for using the purchase method of accounting. There were no accounting policy adjustments made to the carrying values.
The table below summarises the assets and liabilities acquired and the fair value adjustments made at the date of acquisition: Notes
Less: Non-controlling interests UK Commercial Property Trust Limited 19 (181) Perpetual Reset Capital Securities 19 (518) Fair value of net assets acquired 416
Satisfied by: Issue of 40.7 million fully paid up ‘B’ ordinary shares to vendors (a) 332 Issue of 26.5 million contingent rights over shares to vendors (b) 143 Issue of warrants to lenders (c) 4 Issue of 1 million contingent rights over shares in settlement of underwriting fee (d) 5 Acquisition expenses (e) 9
The Pearl businesses contributed £514 million to total revenue, net of reinsurance and £178 million profit before tax attributable to owners for the period between the date of acquisition and the period end. The Group’s consolidated profit before tax attributable to the owners for the year ended 31 December 2009 of £91 million comprises the entity loss before tax of £87 million together with this contribution from the Pearl businesses of £178 million.
The value of the contingent rights over shares has been calculated at €6.70 (£5.91) per share for the €13 threshold shares, €6.10 (£5.38) per share for the €14 threshold shares and €5.60 (£4.94) per share for the €15 threshold shares.
(c) As consideration for facilitating the acquisition, the Company issued five million warrants over its shares to the Lenders. The exercise of the warrants is dependent upon the performance of the business in that the warrants can be exercised at an exercise price of £15. There is no quoted market price for these warrants and therefore an appropriate valuation technique has been used to ascertain their fair value for accounting purposes. A Black–Scholes methodology has been used to value these warrants as at the date of the acquisition. The key assumptions used to ascertain the fair value are as follows: – share price as at the date of acquisition of €9.28; – volatility of 30%; – the warrants are not adjusted for dividends; – upside participation limited to 60%; and – exercise period of seven years.
Segment performance is evaluated based on profit or loss which in certain respects is measured differently from profit or loss in the consolidated financial statements. Group financing (including finance costs) and owners’ taxes are managed on a Group basis and are not allocated to individual operating segments.
No revenue transaction with a single customer amounts to greater than 10% of the Group’s revenue.
Tax attributable to policyholders’ returns 60 – – – 60 Segmental result before the tax attributable to owners 287 9 (145) – 151 100 Phoenix Group Holdings Annual Report & Accounts 2009
4.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result
5.1 Life assurance business Operating profit for life assurance business is based on expected investment returns on financial investments backing owners and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
The investment variances and economic assumption changes excluded from the long term business operating profit reflects the benefit of the reduction in credit spreads on corporate bonds and favourable equity, property and yield movements and are as follows: 2009 £m
Investment return variances and economic assumption changes on long-term business 145 –
5.2 Owners’ funds For non long term business including owners’ funds, the total investment income, including realised and unrealised gains, is analysed between a calculated longer term return and short-term fluctuations.
Variances on owners’ funds of: Subsidiary undertakings 9 – The Company (79) 33
The variances on owners’ funds of the Company comprises unrealised fair value losses arising from movements in the fair value of warrants in issue over the Company’s shares together with foreign exchange losses experienced in the year.
The principal assumptions underlying the calculation of the longer term investment return are: Period ended 31 December 2008
Equities 6.3 – Property 5.8 – Gilts (15 year gilt) 3.7 – Other fixed interest (15 year gilt plus 0.6%) 4.3 –
Investment income Interest income on loans and receivables 76 16 Interest income on financial assets designated at fair value through profit or loss on initial recognition 818 – Dividend income 321 – Rental income 52 – Net expected return on pension assets (9) –
Fair value gains/(losses) Financial assets at fair value through profit or loss Held for trading – derivatives (385) – Designated upon initial recognition – 17 Investment property 159 –
Employee costs 65 – Outsourcer expenses 58 – Investment management expenses and transaction costs 73 – Non-recurring administrative expenses 27 – Operating expenses in respect of investment properties 11 – Depreciation of property, plant and equipment 2 –
The average number of employees 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 £7.2 million (2008: £0.1 million). No services were provided to associated pension schemes.
Interest expense On borrowings at amortised cost 64 – On borrowings at fair value through profit or loss 23 –
Current tax: UK Corporation tax (15) – Overseas tax 5 –
Tax losses arising in the current year carried forward (26) – (31) –
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 benefit attributable to policyholder earnings was £60 million (2008: £nil).
Total tax credit for the year (44) – * The Group’s two operating segments operate predominantly in the UK. The reconciliation of the tax credit has therefore been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
14. Dividends on ordinary shares On 30 March 2010 the Board declared a dividend in respect of 2009. Information on this is given in note 48. No dividends have been declared in respect of the previous period.
The basic earnings per share of 102.9p (2008: 58.1p) has been based on the profit of £95 million (2008 Restated: £31 million) and a weighted average number of ordinary shares outstanding during the year of 92 million (2008: 53 million), calculated as follows: 2009 Number million
The diluted earnings per share of 89.8p (2008: 45.1p) has been based on the profit of £95 million (2008: £31 million) and a diluted weighted average number of ordinary shares outstanding during the year of 106 million (2008: 69 million) calculated as follows: 2009 Number million
Weighted average number of ordinary shares 92 53 Effect of warrants in issue 14 16 Weighted average number of ordinary shares (diluted) 106 69
– 8.5 million contingent rights over shares were granted on 2 September 2009 to the Lenders in part satisfaction of the financing fees incurred by the UK finance companies. These are payable in three tranches conditional upon the share price reaching thresholds of €13, €14 and €15 for 20 consecutive dealing days.
Authorised: 300 million (2008: 300 million) ordinary shares of €0.0001 each 22,050 22,050 110 million (2008: nil) ‘B’ ordinary shares of €0.0001 each 9,700 – Nil (2008: 1 million) preferred shares of €0.0001 each – 74
Ordinary shares and ‘B’ ordinary shares comprise 62% and 38% respectively of total issued shares.
Share in issue at 1 January 2009 (2 January 2008) 75,000,000 5,583 – – Ordinary shares issued to Founders at €0.00124 per unit – – 20,125,000 1,505 Redemption of Founders ordinary shares at par – – (5,125,000) (388) IPO of ordinary shares – – 60,000,000 4,466 ‘B’ ordinary shares issued on acquisition of the Pearl businesses 40,700,000 3,588 – – Ordinary shares issued in part settlement of debt restructuring fees 3,500,000 307 – – ‘B’ ordinary shares issued in part settlement of debt restructuring fees 7,070,000 620 – – ‘B’ ordinary shares issued on assignment of PIK notes and facility 1,500,000 131 – – ‘B’ ordinary shares issued to the employee trust 500,000 44 – – Ordinary shares redeemed on acquisition of the Pearl businesses (6,038,344) (533) – – Ordinary shares issued on conversion of warrants 7,969,076 710 – – Shares in issue at 31 December 130,200,732 10,450 75,000,000 5,583
On 2 September 2009, 3,500,000 ordinary shares and 7,070,000 ‘B’ ordinary shares were issued in part settlement of debt restructuring fees at a premium of £96 million. On the same date, 40,700,000 ‘B’ ordinary shares were issued to the vendors as consideration for the acquisition of the Pearl businesses. These were issued at a premium of £332 million. A further 1,500,000 ‘B’ ordinary shares were issued in exchange for assignment of PIK notes and facility, and were issued at a premium of £12 million. 500,000 ‘B’ ordinary shares were issued to the Pearl Group Limited Employee Benefit Trust (“PGL EBT”) at a premium of £4 million.
On 2 September 2009, 6,038,344 ordinary shares were redeemed at a premium of £41 million.
During the period, 63,298,332 warrants were converted into 7,969,076 ordinary shares. These shares were issued at a premium of £55 million.
18. Share-based payment Equity-settled share-based payments On 11 January 2008, the Company issued and sold to the Sponsors 8,000,000 Sponsors’ warrants in a private placement immediately prior to the consummation of its IPO. The material terms and conditions of the warrants are as for the Founders’ and IPO warrants and the details are disclosed in note 24. The fair value of the Sponsors’ warrants was estimated by using a binominal valuation model on the date of issue based on certain assumptions.
The Sponsors’ warrants were valued at €2.23 on the date of issue before taking account of the trading restriction. The Sponsors gave an undertaking that they would not transfer or sell any of the Sponsors’ warrants, or any shares derived from the Sponsors’ warrants, until one year after the Company consummated a business combination. Such a restriction reduced the fair value of the Sponsors’ warrants below the market value of the public warrants which can be freely traded. The value was reduced to €1.56 on the date of issue after taking into consideration this restriction, using a 30% discount. As the Sponsors paid €1.00 for the warrants, the difference in value of €0.56 is required to be recognised as a charge which equates to £4 million. The fair value of £4 million has been charged over the two-year vesting period. For the year ended 31 December 2009 £2 million has been recognised as a share-based payment charge (31 December 2008: £2 million).
On 2 September 2009, one half of the 8,000,000 outstanding Sponsors’ warrants were converted into 385,838 ordinary shares and the exercise price of the remaining 4,000,000 warrants was increased to €11.00. As the terms of these remaining warrants were modified before vesting, this resulted in a change of fair value. An increase in the exercise price decreases the fair value and therefore, in accordance with IFRS 2, there was no change to the original accounting.
As there either are no performance criteria (BSP), or the performance criteria are considered likely to be met (LTIP) the fair value of the awards has been determined assuming that all granted shares vest. The share price at 21 September 2009 has been used in determining the fair value of these awards, this date being the start of the vesting period. The resulting 2009 expense to be recognised in the consolidated income statement in relation to these schemes is £0.6 million (2008: £nil) based on a charge from 21 September 2009 and two and three-year vesting periods for the BSP and LTIP respectively.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment by the issue of securities (“ACSM instruments”) by either PGH1 or a special purpose subsidiary of PGH1 established for the purpose of issuing ACSM instruments and which are guaranteed by PGH1. The obligations of PGH1 in respect of such securities, or if applicable, guarantee will be subordinated to and rank or be expressed to rank junior to the Notes as to rights to payments of interest and participation in the assets of PGH1 in a winding up and shall comply with the then current requirements of the FSA in relation to Tier 1 Capital. ACSM instruments will in the first instance be offered to related parties (as defined in the Terms and Conditions of the Notes as amended by the Supplemental Trust Deed dated 30 July 2008) and to third parties if not purchased by related parties. In the event that neither such related parties nor third parties will purchase the required ACSM instruments then PGH2 is required to use its best endeavours to raise such funds as are deemed necessary to purchase the required amounts of ACSM instruments.
For so long as a deferred coupon payment has not been satisfied PGH1 may not declare, pay or distribute a dividend on any of its securities in issue ranking junior to the Notes including the ordinary shares of PGH1 or any parity securities or, except in particular circumstances, redeem, purchase or otherwise acquire any of its securities in issue ranking junior to the Notes, including its ordinary shares or any parity securities.
Life assurance business: Insurance contracts 38,965 2,860 – – Investment contracts with DPF 11,326 – – –
At 2 January 2008 and 1 January 2009 – – On acquisition of the Pearl businesses 546 – Transfer from income statement 175 –
Carrying value Debenture loans Limited recourse bonds 2012 7.39% (note a) 48 – Limited recourse bonds 2022 7.59% (note a) 86 – Unsecured loan notes (note b) 18 – £200 million 7.25% unsecured subordinated loans (note c) 119 – £779 million loan (note d) 764 – £15 million loan (note e) 15 – £2,260 million syndicated loan (note f) 2,260 – £80 million facility agreement (note g) 42 – £100 million PIK notes and facility (note h) 102 – £75 million secured loan note (note i) 70 – £425 million loan facility (note i) 399 –
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 £42 million have an average remaining life of two years maturing in 2012. The £120 million 7.59% limited recourse bonds with an outstanding principal of £120 million have an average remaining life of nine years maturing in 2022. NPLL has provided collateral of £88 million to provide security to the holders of the NPLL recourse bonds in issue.
(b) Unsecured loan notes of £72 million were issued by Impala Holdings Limited (“Impala”) at par on 14 May 2008 at an interest rate of LIBOR minus 1% per annum with a final maturity date of 2012. Phoenix Group Holdings acquired these loan notes as part of the acquisition of the Pearl businesses and they were recognised at their fair value. As at 31 December 2009 £54 million of these loan notes had been repaid and £18 million were outstanding.
(d) 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 May 2016. Phoenix Group Holdings acquired these loans as part of the acquisition of the Pearl businesses and they were recognised at their fair value.
(e) On 3 June 2008, Axial Fixed Income Opportunities S.a.r.l. issued B loans consisting of €9,397,311; £3,015,429 and US$4,476,558. These loans accrue a fixed interest rate of 0.1% plus a variable profit-related element and mature in May 2016. Phoenix Group Holdings acquired these loans as part of the acquisition of the Pearl businesses and they were recognised at their fair value.
22. Borrowings (continued) (f) 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. For financial reporting purposes, Phoenix Group Holdings was deemed to have acquired this facility as part of the acquisition of the Pearl businesses and it was recognised at its fair value. 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.
The borrowings under the £2,260 million facility are secured by: – first fixed and floating charges over all the assets and undertaking of PGH (LC1) Limited and PGH (LC2) Limited
(including their respective 12.5% shareholding in Impala, all real estate, book debts, bank accounts, investments and other assets); and
(i) 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. For financial reporting purposes, Phoenix Group Holdings was deemed to have acquired this facility as part of the acquisition of the Pearl businesses and it was recognised at its fair value. On 2 September 2009, this facility was restructured as follows: – £75 million of the existing facility was converted into two £37.5 million 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%.
Refinancing loan (j) The refinancing loan from Abbey National plc was acquired as part of the acquisition of the Pearl businesses. The loan was brought into the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Abbey National plc finances to the value of the associated property reversions. As part of the arrangement Abbey National plc receive an amount calculated by reference to the movement in the Halifax House Price Index and NPLL and NPI Limited (“NPI”) have undertaken to indemnify Abbey National plc against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years.
The fair values of derivative financial instruments are as follows: £m £m £m
Warrants over shares in Phoenix Group Holdings – 23 – 11 Forward currency 189 181 – – Credit default options 4 29 – – Interest rate swaps 1,683 1,430 – – Swaptions 285 – – – Inflation swaps 20 2 – – Total return bond swaps 27 – – – Equity options 191 – – – Stock index futures 1,141 1,177 – –
24. Derivatives (continued) The amount recoverable after one year is £2,143 million (2008: £nil). The amount payable after one year is £1,394 million (2008: £nil).
Certain cash collateral on derivatives is available to the Group for investment purposes and is therefore recognised as a financial asset and a liability, recorded as ‘Obligations for repayment of collateral received’ in the statement of consolidated financial position. At 31 December 2009, the amount of collateral recognised as a financial asset and ‘Obligations for repayment of collateral received’ amounted to £1,041 million (2008: £nil) and £1,099 million (2008: £nil) respectively.
At 2 January 2008 – – – – Issuance to Founders (10 January 2008) – 20,125,000 – – Redemption from Founders (5 February and 11 March 2008) – (5,125,000) – – Initial Public Offering (13 February 2008) 60,000,000 – – –
The exercise period commenced on the later of: – consummation by the Company of a business combination; and – first anniversary of the date the units are admitted to trading on Euronext.
The warrants will expire at the close of trading on Euronext on the first business day after 6 February 2013 or earlier upon redemption or liquidation. Once the warrants become exercisable, the Company may call the warrants for redemption: – in whole but not in part; – at a price of €0.01 per warrant; – upon not less than 30 days’ prior written notice of redemption to each warrant holder; and – if, and only if, the reported last sale price of the share equals or exceeds €13.75 per share for any 20 trading days within a period of 30 consecutive trading days ending on the third business day prior to the notice of redemption to warrant holders. On 2 September 2009 the threshold of €13.75 was increased to €16.50.
If the foregoing conditions are satisfied and the Company issues notice of redemption of the warrants, each warrant holder shall be entitled to exercise their warrant prior to the scheduled redemption date. However, the price of the shares may fall below the redemption trigger price or the warrant exercise price after the redemption notice is issued.
Lenders’ warrants On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitle the holder to purchase one ‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of a premium listing of the ordinary shares on the LSE, the Lenders’ warrants will be over ordinary shares rather than ‘B’ ordinary shares.
The exercise period commences on the date of the warrant agreement and terminates on the first to occur of: – 15th anniversary of the date issued; – date fixed for the redemption of the warrants; and – liquidation of the Company.
The exercise period commences on the date of the warrant agreement and 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
Fair value Financial liabilities at fair value through profit or loss: Designated upon initial recognition 9,774 – Held for trading – derivatives 2,842 11 Financial liabilities measured at amortised cost 8,487 –
At 2 January 2008 and 1 January 2009 – – – – – – On acquisition of the Pearl businesses 13 38 22 18 30 121 Additions in the year – 2 – – 12 14
The restructuring provision relates principally to the anticipated redundancy costs associated with the closure of the Group’s Glasgow and Peterborough life operations, which is expected to occur in 2010 and 2011.
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used ranged between 5.00% and 6.07% and it is expected that the provision will be utilised over the next eight years.
On acquisition of the Pearl businesses (695) – Amounts credited to the income statement 31 – Amounts charged to the statement of other comprehensive income (31) – At 31 December (695) –
These can only be offset against future capital gains and no expiry date.
General insurance Due to the historic diversity of issued general insurance policies and taking into account the legal and regulatory environment for hazardous risks, it is possible that additional claims could emerge from long tail unexpired risks albeit it is not possible to predict the quantum, location or timing of such occurrences.
29. Payables related to direct insurance contracts (continued) Pearl Assurance plc Within Pearl Assurance plc (“Pearl”) 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.
PA (GI) Limited Within PA (GI) Limited the provision for outstanding general insurance claims comprises the estimated ultimate cost of settling claims notified but not settled by the period end. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The general insurance liabilities of PA (GI) Limited are wholly reinsured externally to RSA .
The carrying value of the defined benefit pension schemes is set out below: 2009 £m 2008 £m
32.1 Pearl Group Staff Pension Scheme The Pearl Group Staff Pension Scheme (“the Pearl Scheme”) comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members.
Defined contribution scheme The Group participates in the defined contribution section of the Pearl Scheme. Contributions in the period 28 August to 31 December 2009 amounted to approximately £1 million.
Defined benefit scheme The Pearl Scheme is funded by payment of contributions to a separately administered trust fund and is subject to regular valuations by an independent qualified actuary. A Group company, PGH2 is the principal employer of the Pearl Scheme.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2009, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
The discount rate and inflation rate assumptions used for the calculation of the liabilities have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme liabilities. This method determines an equivalent single rate for both the discount and inflation rates, which is derived from the profile of projected benefit payments.
Current service cost – – Interest cost (32) – Expected return on scheme assets 27 –
The net actuarial gains and losses recognised in other comprehensive income comprise the following: 2009 £m 2008 £m
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £29 million.
Fair value of scheme assets 1,684 – Present value of defined benefit obligation (1,805) – Deficit (121) –
Expected return on scheme assets 27 – Actuarial gains on scheme assets 36 –
The change in the present value of the defined benefit obligation is as follows: 2009 £m 2008 £m
On acquisition of the Pearl businesses 1,791 – Current service cost – – Interest cost 32 – Actuarial losses 7 – Benefits paid (25) – At 31 December 1,805 –
On acquisition of the Pearl businesses 1,583 – Expected return on scheme assets 27 – Actuarial gains on scheme assets 36 – Contributions by the employer 63 – Benefits paid (25) – At 31 December 1,684 –
32. Pension schemes (continued) The distribution of the scheme assets at the end of the year was as follows: 2009 £m 2008 £m
Experience gains on scheme liabilities 58 32.2 PGL Pension Scheme Defined contribution scheme The Group participates in the defined contribution section of the PGL Pension Scheme (“the PGL Scheme”). Contributions in the period from 28 August 2009 to 31 December 2009 amounted to £1 million.
The economic value of the PGL Scheme assets as at 31 December 2009 amounted to £1,192 million and the economic value of the surplus amounted to £62 million. For financial reporting purposes the carrying value of the insurance policies effected by the PGL Scheme with the Group amounting to £66 million have been eliminated on consolidation, resulting in reported assets of the PGL Scheme as at 31 December 2009 of £1,126 million and a reported deficit of £4 million.
Current service cost (2) – Interest cost (21) – Expected return on scheme assets 17 –
On acquisition of the Pearl businesses 1,176 – Current service cost 2 – Interest cost 21 – Actuarial gains (53) – Benefits paid (16) – At 31 December 1,130 –
Bonds 995 – Properties 110 – Cash and other 21 –
Fair value of scheme assets 1,126 Defined benefit obligation (1,130) Deficit (4)
Cost or valuation At 2 January 2008 and 1 January 2009 – – – – – On acquisition of the Pearl businesses 77 2,213 445 31 2,766
Goodwill Goodwill of £77 million was created upon the acquisition of the Pearl businesses and is not amortised. The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. Value in use has been determined as the present value of certain future cash flows associated with the Ignis Asset Management business and the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group’s operating plan and for the period 2014 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. Future cash flows have been valued using a discount rate of 10.0%.
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million and to the Ignis Asset Management segment is £38 million.
Acquired in-force business Acquired in-force business of £2,213 million was recognised upon the acquisition of the Pearl businesses and represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance and investment contracts with and without DPF and the liability measured in accordance with the Group’s accounting policies for such contracts.
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 11.4%. The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between five and seven years. These IMC customer relationships intangibles have been allocated to the Ignis Asset Management segment.
PVFP on non participating business in the with profit fund The value of the PVFP is determined in accordance with the FSA’s realistic capital regime and is allocated in full to the Phoenix Life segment. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 42.5.1.
During the year £4 million of PVFP was credited directly to the consolidated income statement.
At 2 January 2008 and 1 January 2009 – On acquisition of the Pearl businesses 1,807 Additions 189 Improvements 5 Disposals (245) Gains on adjustments to fair value 159
Investment property is stated at fair value and is independently valued in accordance with the Royal Institute of Chartered Surveyors’ guidelines on the basis of the open market value of such properties.
Investment properties include £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.
36. Financial assets and financial instrument fair value hierarchy 2009 £m 2008 £m
Loans and receivables at amortised cost 1,081 – Financial assets at fair value through profit or loss Held for trading – derivatives 3,540 – Designated upon initial recognition Equities 13,151 – Fixed and variable rate income securities 37,658 – Collective investment schemes 6,094 –
The fair value of loans and receivables at amortised cost amounted to £1,074 million (2008: £nil).
36. Financial assets and financial instrument fair value hierarchy (continued) 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.
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
Level 3 financial instrument sensitivities Included in Level 3 investments are two property investment structures with a value of £106 million and £110 million respectively.
Significant transfers of financial instruments between Level 1 and Level 2
2009 saw an improvement in the liquidity of the fixed and variable rate securities market which has resulted in a number of securities moving from Level 2 into Level 1. There were however, a number of securities that moved from Level 1 to 2 as a result of a downgrading in their credit rating. These securities were mainly in the financial sector with issuers such as banks and insurance companies.
Movement in Level 3 financial instruments measured at fair value £m
Financial assets designated at fair value through profit or loss upon initial recognition Equities – 1,513 2 (25) 4 1,494 29 Fixed and variable rate income securities – 839 (18) 80 (82) 819 (18)
37. Stock lending The Group lends listed financial assets held in its investment portfolio to other institutions. The Group conducts its stock lending programme only with well-established, reputable institutions in accordance with established market conventions.
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long term business operations and collective investment schemes of £5,551 million (2008: £nil) are primarily held for the benefit of policyholders and so are generally not available for use by the owners.
40.2 Cash flows on acquisition of the Pearl businesses 2009 £m
The capital policy of each life company is set by each life company Board and monitored on a daily basis. 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.
Pillar 1 With the exception of with profit businesses, the regulatory capital requirement under Pillar 1 is the total amount held in respect of investment, expense and insurance risks (the ‘long-term insurance capital requirement’ (“LTICR”)) and any additional amounts required to cover the more onerous of two specified stress tests (the ‘resilience capital requirement’ (“RCR”)). The regulatory capital requirement is then deducted from the available capital resources to give the excess capital on a regulatory basis
A further test is required under Pillar 1 in respect of with profit funds which may result in an additional capital requirement referred to as the ‘with profit insurance capital component’ (“WPICC”).
The Group acquired its life assurance business upon the purchase of the Pearl businesses, information on which is given in note 3. The Group’s material with profit funds at 31 December 2009 are shown separately in the capital position statement and the less material with profit funds are aggregated and shown as ‘Other’. The with profit funds shown separately are the Phoenix with profit fund (“PLL PWP”), the Britannic with profit fund (“PLL BWP”), the SMA with profit fund (“SMA WPF”), the Scottish Provident with profit fund (“SPL WPF”) and the Pearl with profit fund (“Pearl WPF”). The with profit funds of London Life Limited and Phoenix & London Assurance Limited (“PALAL”) are aggregated within the ‘Other’ column.
The contributions made by Phoenix Pensions Limited (“PPL”) and NPLL to the Group’s capital resources are included in the column headed ‘Phoenix Life owners’ funds’, since they are owned by the Group’s life business owners’ funds. An allocation of capital and loans from the Phoenix Life owners’ funds to the Group’s non participating business is made in respect of PPL and to the Pearl WPF in respect of NPLL representing capital resources to cover the capital resources requirement of the PPL and NPLL long-term funds respectively. The non participating business and other activities are shown in aggregate in the capital position statement. Virtually all activities of the Group relate to UK business.
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.
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 Adjustments onto a regulatory basis: Valuation difference between IFRS basis and regulatory basis – 91 (8) 83 Other qualifying capital: Allocation of group capital 122 206 (328) – Total available capital resources at 31 December 2009 4,470 586 1,919 6,975 1 Regulatory adjustments to assets reflect adjustments to derecognise inadmissible assets such as intangibles and deferred tax assets as well as those adjustments that are necessary where asset and counterparty exposures exceed the prescribed regulatory limits. 2 Regulatory adjustments to liabilities reflect the different valuation basis for insurance liabilities on a regulatory basis. 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. 4 ‘Other activities and consolidation adjustments’ represent the contribution to consolidated owners’ funds arising outside of the Phoenix Life business. This includes the owners’
An analysis of the movement in available capital resources for the period 1 January 2009 to 31 December 2009 is shown below: With profit Non participating £m
Adjustment for internal loans in excess of counterparty limits – – – – – – – (37) (37)
Total available capital resources at 31 December 2009 984 927 803 294 643 819 586 1,919 6,975
42. Risk management The Group is exposed to a number of risks in its business including those arising from underlying assets and liabilities. The Group’s overall approach to risk management is described in the Performance section of the Annual Report & Accounts.
42.2 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 liquidity 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 is provided in note 42.5 below.
42.3 Financial risk analysis Transactions in financial instruments may result in the Group assuming financial risks. This includes credit risk, market risk and liquidity risk. Each of these are described below, together with a summary of how the Group manages them.
Quality of credit assets An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure with external credit ratings: AAA
B and below £m Non rated £m Unit linked £m Total £m
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
42. Risk management (continued) 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.
Cash and cash equivalents 5,684 – – – – 397 6,081
Cash and cash equivalents 2 – – – – – 2 Amounts in trust 591 – – – – – 591
The Group is mainly exposed to market risk as a result of: – the mismatch between liability profiles and the related asset investment portfolios; – the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with profit funds and assets held to meet regulatory capital and solvency requirements; and – the income flow of management charges from the invested assets of the business.
Interest 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.
The sensitivity analysis for interest risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest rates on all assets and liabilities that contribute to the Group’s reported profit after tax and equity.
With profit business and non profit business within the with profit funds are exposed to interest risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest stocks and derivatives. For with profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits. The contribution of these funds to the Group result is determined primarily by either the shareholders’ share of the declared annual bonus or by the shareholders’ interest in any change in value in the capital advanced to the Group’s with profit funds.
In the non participating funds, policy liabilities are duration matched with primarily fixed interest securities, with the result that sensitivity to changes in interest rates is very low.
The portfolio of marketable equity securities, and property investments, which is carried in the statement of consolidated financial position at fair value, has exposure to price risk. The Group’s objective in holding these assets is to earn higher long-term returns by investing in a diverse portfolio of high quality equities and properties. Portfolio characteristics are analysed regularly and price risks are actively managed in line with investment mandates. The Group’s holdings are diversified across industries, and concentrations in any one company or industry are limited.
The sensitivity analysis for equity and property price risk illustrates how a change in the fair value of equities and properties affects the Group result. It takes into account the effect of such changes in equity and property prices on all assets and liabilities that contribute to the Group’s reported profit after tax and in equity.
There is also an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with profit funds, unit linked funds, non profit funds (where risks and rewards fall wholly to shareholders) and in shareholders’ funds.
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 £216 million (2008: £nil).
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.
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £91 million (2008: £nil).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year and a decrease in equity of £83 million (2008: £nil).
42. Risk management (continued) 42.5.1 Assumptions Valuation of participating insurance and investment contracts For participating business, which is with profit business (insurance and investment contracts), the insurance contract liability is calculated in accordance with the FSA’s realistic capital regime, adjusted to exclude the shareholders’ share of future bonuses and the associated tax liability as required by FRS 27 ‘Life Assurance’. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Change in longevity assumptions (73) – Change in persistency assumptions 94 –
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.
Some pensions’ contracts include guaranteed annuity options which (see deferred annuities in section 42.5.2 for details). The total amount provided in the with profit and non profit funds in respect of the future costs of guaranteed annuity options are £1,469 million (2008: £nil) and £52 million (2008: £nil) respectively.
In common with other life companies in the UK that 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 £325 million (2008: £nil) and £46 million (2008: £nil) respectively.
42. Risk management (continued) With profit deferred annuities participate in profits only up to the date of retirement. At retirement, a Guaranteed Cash Option (“GCO”) allows the policyholder to commute the annuity benefit into cash on guaranteed terms.
42.5.2 Managing product risk The following sections give an assessment of the risks associated with the Group’s main life assurance products and the ways in which the Group manages those risks.
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 investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.
The guaranteed terms on GAR policies are more favourable than the annuity rates currently available in the market available for cash benefits. The guaranteed terms on GCO policies are currently not valuable.
Investment risk depends on the extent to which the annuity payments under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.
43. Operating leases Operating lease rentals charged within administrative expenses amounted to £15 million (2008: £nil).
The principal operating lease commitments primarily concern office space located at Bothwell Street, Glasgow; St Vincent Street, Glasgow; Juxon House, London and Harcourt Street, London.
Transactions with pension schemes During the year the Group entered into the following transactions with its pension schemes: £m
Pearl Scheme Investment management fees 1.4 1.4 Payment of administrative expenses (1.0) (0.3)
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2009 the Pearl Scheme held 1,118,197 units in the Axial Systematic Strategies Fund and 115,477,491 units in the Ignis Liquidity Fund. The value of these investments at 31 December 2009 was £154 million (2008: £nil) and £115 million (2008: £nil) respectively.
On 4 January 2008, the one ordinary share issued at formation was transferred to Berggruen Acquisition Holdings Limited (an affiliate of Berggruen Acquisition Holdings II Ltd) and one additional ordinary share was issued to Marlin Equities IV, LLC. These two shares were subsequently repurchased by the Company on 11 January 2008.
Berggruen Acquisition Holdings II Ltd 9,934,505 12,341 Marlin Equities IV, LLC 9,934,505 12,341 Dimitri Goulandris 85,330 106 Guy Naggar 85,330 106 Miguel Pais do Amaral 85,330 106
On 11 January 2008, each of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC agreed to invest €4.0 million (€8.0 million in the aggregate) in the Company in the form of Sponsors’ warrants to purchase 4,000,000 shares (8,000,000 in the aggregate) at a price of €1.00 per warrant. Each of Berggruen Acquisition Holdings II Limited and Marlin Equities IV, LLC purchased such Sponsors’ warrants from the Company immediately prior to the consummation of the IPO on 13 February 2008.
On 11 January 2008, each of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC agreed to invest €25.0 million and Mr Naggar agreed to invest €10.0 million (€60.0 million in the aggregate) in the Company in the form of co-investment units at a price of €10.00 per unit immediately prior to the consummation of a business combination. In connection with the business combination the co-investment rights were cancelled.
Berggruen Acquisition Holdings II Ltd 1,419,215 1,760 Marlin Equities IV, LLC 1,419,215 1,760 Dimitri Goulandris 12,190 15 Guy Naggar 12,190 15 Miguel Pais do Amaral 12,190 15
On 27 June 2009, the Company entered into a contingent subscription agreement with Berggruen Acquisition Holdings II Ltd and Marlin Equities, IV, LLC where by the Company agreed to grant to them or their nominees the right to receive 1,000,000 ‘B’ ordinary shares in exchange for Berggruen Acquisition Holdings II Ltd and Marlin Equities, IV, LLC agreeing to subscribe for new shares to a maximum value of £75 million, should the available cash in the Company fall below £450 million on the acquisition of the Pearl businesses. These will be issued if the share price of the company exceeds €15.00 for 20 consecutive trading days.
On 2 September 2009, in connection with the acquisition of the Pearl businesses, the Company repurchased the Founders’ shares from Guy Naggar and concurrently cancelled the related Founders’ warrants.
Berggruen Acquisition Holdings II Ltd 3,702,300 357,122 Marlin Equities, IV, LLC 3,702,300 357,122 Dimitri Goulandris 31,800 3,067 Miguel Pais do Amaral 31,800 3,067
During the year the Group has been charged a transitional services fee of £0.4 million from TDR Capital LLP, a company in which Manjit Dale is deemed to have significant influence. This amount was outstanding at 31 December 2009.
As a result of the acquisition of the Pearl businesses, TDR Capital Nominees Limited (as nominee for TDR Capital I and other related entities) received 13,014,055 ‘B’ ordinary shares and 10,871,095 contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies. TDR Capital Nominees Limited is a subsidiary of TDR Capital LLP.
As a result of the acquisition of the Pearl businesses the Jambright Limited group of companies, a group in which Manjit Dale is deemed to have significant influence, received 4,506,268 ‘B’ ordinary shares in Phoenix Group Holdings in exchange for shares it held in the acquired group of companies.
During the year the Group has also been charged a transitional services fee of £0.1 million and investment management fees of £0.4 million from Sun Capital Partners Limited, a company in which Hugh Osmond is deemed to have significant influence. The transitional services fee was outstanding at 31 December 2009.
As a result of the acquisition of the Pearl businesses O-Re Holdings (Netherlands) BV, a company in which Manjit Dale and Hugh Osmond are deemed to have significant influence, received 2,481,064 ‘B’ ordinary shares and 2,198,970 contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies.
As a result of the acquisition of the Pearl businesses, some of the Directors received shares and contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies. Details of the shareholdings of Directors are provided in the Remuneration Report.
46. Contingent liabilities In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration, and as at the period end, the Group has a contingent liability in this regard.
47. Group entities The principal subsidiary undertakings of the Group are as follows: Country of incorporation and principal place of operation
Impala Holdings Limited (holding company) UK ‘A’ ordinary shares of £1, ‘B’ ordinary shares of £1 and ‘D’ ordinary shares of £1.
‘B’ ordinary shares of £1 PGH (LCA) Limited (finance company) UK Ordinary shares of £1 PGH (LCB) Limited (finance company) UK Ordinary shares of £1 PGH (LC1) Limited (finance company) UK Ordinary shares of £1 PGH (LC2) Limited (finance company) UK Ordinary shares of £1 PGH (MC1) Limited (finance company) UK Ordinary shares of £1 PGH (MC2) Limited (finance company) UK Ordinary shares of £1 PGH (TC1) Limited (holding company) UK Ordinary shares of £1 PGH (TC2) Limited (holding company) UK Ordinary shares of £1 Pearl Group Holdings (No. 1) Limited (finance company) UK Ordinary shares of £1 Pearl Group Holdings (No. 2) Limited (holding company) UK Ordinary shares of £1 Pearl Life Holdings Limited (holding company) UK Ordinary shares of £1 Pearl Group Services Limited (service company) UK Ordinary shares of £1 PGS 2 Limited (finance company) UK Ordinary shares of £1 Pearl Group Management Services Limited (service company) UK Ordinary shares of £1 Phoenix Life Holdings Limited (holding company) UK Ordinary shares of £1 UK Commercial Property Trust Limited (property fund) Guernsey 72% of ordinary shares of £0.25 156 Phoenix Group Holdings Annual Report & Accounts 2009
The information disclosed above is only in respect of those undertakings which principally affect the figures shown in the Group’s accounts. There are a number of other subsidiaries and associated undertakings whose business does not materially affect the Group’s profits or the amount of its assets and particulars of these have been omitted in view of their excessive length.
There is a restriction on the ability of some Group companies to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Impala facility and the £425 million loan facility agreements.
48. Events after the reporting period On 5 January 2010 PGH1 announced a proposed restructuring of the Notes. The proposed restructuring was not approved by Noteholders and consequently those proposals were not implemented.
On 23 March 2010 PGH1 gave notice to the holders of the Notes of its decision to defer the coupon payment on the Notes which would otherwise have been due at the next payment date of 25 April 2010. PGH1 announced that this notice will be withdrawn and the 2010 coupon will be paid in full on 25 April 2010 if certain amending proposals are approved by, amongst others, the Noteholders. These proposals include a reduction of 15% in the face value of the Notes and the payment in full of the deferred 2009 coupon by 31 December 2010. Both proposed coupon payments are to be based on the current nominal value of the Notes, being £500 million.
160 Statement of Directors’ responsibilities 161 Auditor’s report 162 Summarised consolidated income statement – pro forma Group MCEV basis 162 Pro forma MCEV earnings per ordinary share 163 Statement of consolidated comprehensive income – pro forma Group MCEV basis 163 Reconciliation of movement in pro forma Group MCEV equity 164 Analysis of movement in pro forma Group MCEV equity 166 Pro forma Group MCEV analysis of earnings 167 Reconciliation of Group IFRS equity to MCEV net worth 168 Notes to the pro forma MCEV financial statements
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.
Specifically, the Directors have: – Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to relevant external data, and then applied them consistently; – Made estimates that are reasonable and consistent; and – 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.
Auditor’s report to the Directors of Phoenix Group Holdings on the Pro forma Consolidated Phoenix Group Market Consistent Embedded Value (MCEV) We have audited the Pro forma Consolidated Phoenix Group MCEV (Phoenix Group MCEV) supplementary information, on pages 162 to 177, in respect of the year ended 31 December 2009, which comprises the Summarised consolidated income statement – pro forma Group MCEV basis, Pro forma MCEV earnings per ordinary share, Statement of consolidated comprehensive income – pro forma Group MCEV basis, Reconciliation of movement in pro forma Group MCEV equity and the related notes. The Phoenix Group MCEV supplementary information, has been prepared in accordance with the basis of preparation set out on pages 168 to 171.
Our responsibilities, as independent auditors, in relation to the Phoenix Group MCEV supplementary information, are established in the UK by the Auditing Practices Board, our profession’s ethical guidance and the terms of our engagement letter.
Opinion In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2009, has been properly prepared, in all material respects, in accordance with the basis of preparation set out on pages 168 to 171.
Economic variances on covered business 701 Economic variances on non‑covered business (245) Non‑recurring items (78) Gain on debt refinancing 491 Finance costs attributable to owners (390) Group MCEV earnings before tax 853
Tax on operating earnings (105) Tax on non‑operating earnings (197) Total tax (302)
Summarised consolidated income statement – pro forma Group MCEV basis For the year ended 31 December 2009 162 Phoenix Group Holdings Annual Report & Accounts 2009
Statement of consolidated comprehensive income – pro forma Group MCEV basis For the year ended 31 December 2009 2009 £m
Other comprehensive income Actuarial losses on defined benefit pension scheme (14) Exchange differences on translating foreign operations (44)
Reconciliation of movement in pro forma Group MCEV equity For the year ended 31 December 2009 £m
Life MCEV operating earnings (after tax) Expected existing business contribution 95 New business value 22 Non‑economic experience variance and assumption changes – Experience variances 62 – Other operating variances 21 – Assumption changes 73 Total non‑economic experience variances and assumption changes 156 Life MCEV operating earnings after tax1 273 1 Life MCEV operating earnings is 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 using a tax rate of 28%. Life MCEV operating earnings before tax of £380 million is therefore calculated as £273 million (as above) grossed up for tax at 28%
Expected existing business contribution The expected contribution of the existing business for the year ended 31 December 2009 was £95 million after tax. This represents the expected return on the opening MCEV using a one year gilt forward rate plus the Group’s short‑term expectations of excess investment returns on equities, properties and bonds. This rate is expected to increase in line with the forward gilt yield curve.
The new business margin is 5% after tax and represents the ratio of the net of tax new business value to the amount received as new single premiums.
Favourable experience and other operating variances of £83 million primarily related to several management actions including the resolution of certain legacy issues, partially offset by the strengthening of regulatory capital requirements and capital policy in some life companies following the acquisition of the Pearl businesses by Phoenix Group Holdings. Favourable assumption changes of £73 million mainly related to harmonisation of longevity assumptions across the Group and the results of an annuitant survival investigation.
Corporate operating loss The Corporate operating loss of £54 million before tax for the year ended 31 December 2009 includes: – Corporate office costs and project spend of £14 million; and – Net expected charge on the Pearl Group Staff Pension Scheme of £22 million and a £17 million contribution to the PGL
pension scheme. The £17 million contribution is an expense under the Group’s MCEV methodology as a deduction to the Group MCEV is made for pension schemes in deficit, but no credit is taken for pension scheme surpluses.
Economic variances on covered business Positive economic variances in 2009 of £504 million after tax reflect the benefit of the reduction in credit spreads on corporate bonds and favourable equity and yield movements, partially offset by an increase of £36 million in the market value of listed debt issued by Phoenix Life Limited (ex‑Scottish Mutual Assurance).
Non‑recurring items Non‑recurring items reduced the embedded value by £78 million before tax and primarily include: – £27 million of costs associated with the Phoenix Life site rationalisation and associated staff reductions and the Group’s transformation programme with its outsourcers
– £44 million of acquisition related expenditure incurred by Phoenix Group Holdings subsidiaries – A charge of £78 million after tax as a consequence of the restructuring of the Pearl businesses external debt which reduced the expected tax attributes available to the Group to relieve the tax on the emerging surpluses from the operating businesses
– A charge of £12 million after tax related to the court approved Guaranteed Annuity Option Compromise Scheme for Phoenix & London Assurance. This removed longevity risk from the business whilst providing policyholder benefit enhancements
Gain on debt refinancing As part of their acquisition by Phoenix Group Holdings, the Pearl businesses successfully refinanced their external borrowings resulting in an overall reduction of £575 million in exchange for cash and an issue of warrants totalling £84 million.
Capital movements comprised additional shares issued of £275 million at the time of the acquisition of the Pearl businesses, £51 million of shares issued on conversion of the warrants, £5 million of share‑based payments offset by £41 million of shares redeemed at the time of the acquisition of the Pearl businesses.
Operating MCEV earnings (post‑taxation) 273 10 24 (38) 269 Non‑operating MCEV earnings (post‑taxation) 511 (25) (4) (200) 282 Total MCEV earnings 784 (15) 20 (238) 551
Group net assets attributable to owners of the parent as reported under IFRS at 31 December 2009 1,412 Goodwill and other intangibles in accordance with IFRS (after tax) (413) Value of in‑force business in accordance with IFRS (after tax) (1,419) Adjustments to IFRS reserving (98) Tax adjustments (99) Revalue listed debt to market value 235 Eliminate value of contingent loans asset1 (194) Fair value adjustments2 (40) Eliminate pension scheme surplus3 (after tax) (45) Other adjustments (9) MCEV net worth attributable to owners of the parent at 31 December 2009 (670) 1 Removal of value attributed to contingent loans issued by holding companies to long‑term funds as their expected repayments are captured within the
The supplementary MCEV information reflects the financial position of the Group at 31 December 2009. The asset management and management service businesses are included in the Group MCEV at the value of IFRS net assets and do not include the future earnings from their existing business. This is because, in the opinion of the Directors, applying the CFO Forum MCEV principles and guidance to these businesses would not provide a fair reflection of the Group’s financial position, as explained in note 8.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in October 2009, except that: – Risk‑free rates have been defined as the annually compounded UK government nominal spot curve plus ten basis points rather than as a swap rate curve; – No allowance for the cost of residual non‑hedgeable risk (“CNHR”) has been made because, in the opinion of the Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is focussed entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR is disclosed separately in note 1 (b); and
The components of MCEV are: A – ssets available for distribution to shareholders, or free surplus; plus A – ssets supporting the solvency requirements of the business, or required capital; plus T – he value of in‑force covered business.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in the life company nor as a liability in the holding company. This presentation has no impact on the overall MCEV but does affect the allocation of net assets between covered and non‑covered business.
MCEV allocates net worth between required capital, whose future distribution to shareholders is restricted by regulatory requirements, and free surplus.
On this basis the required capital measure is 125% of the solvency capital at which the regulator is empowered to take action.
The European Solvency II Directive will introduce a new capital regime for insurers during 2012. These disclosures do not take account of the impact of the change in regime as this is still under development.
The projection is based on actively reviewed best estimate non‑economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence to justify; for example in allowing for future mortality improvements on annuity business.
However, the cost of residual non‑hedgeable risk calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating further risk management actions, has been disclosed below.
For other business the cost would be £141 million. This equates to an equivalent average cost of capital charge of 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.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies. The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of debt are reduced and then refinanced to maintain a long‑term level of debt that the Directors consider to be supported by the projected embedded value of the Group’s businesses.
4. New business 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.
6. Economic assumptions (continued) (b) Liquidity premiums In October 2009, the CFO Forum published an amendment to MCEV principles to reflect the inclusion of a liquidity premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk‑free yield curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or with 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. At 31 December 2009 the calculated liquidity premium represented an additional yield above risk‑free rates of 30 basis points (31 December 2008: 70 basis points).
Inflation For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index (“RPI”) as at 31 December 2009 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 2009.
Real interest rates have been modelled using the two‑factor Vasicek model, calibrated to index‑linked gilts. Equity volatility is calibrated to replicate the prices on a range of FTSE equity options, and extrapolated beyond terms available in the market. The equity volatility model used allows volatility to vary with both term and the level of the equity index.
6. Economic assumptions (continued) 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 2009 includes Perpetual Reset Capital Securities with a face value of £500 million and subordinated debt with a face value of £200 million in relation to Phoenix Life Limited (ex‑Scottish Mutual Assurance). These listed securities have been included within the MCEV at their market value quoted at the reporting date.
8. Reconciliation of pro forma Group MCEV to previously published EV The MCEV allows for methodology changes from previously published embedded values. The methodology changes have been implemented to better align the Group’s methodology with the CFO Forum principles. Details of these adjustments and methodology changes and a reconciliation to the EV at 31 December 2008, as published in the proxy statement of 3 July 2009, are provided below.
Our Annual General Meeting will be held on: The voting results for our 2010 AGM, including proxy votes withheld, will be available on our website shortly after the meeting at the following address.
Announcement of financial results for the year ended 31 December 2009 31 March 2010 Annual General Meeting 23 June 2010 Announcement of first quarter interim management statement 17 May 2010 Announcement of unaudited six months’ interim results 27 August 2010 Announcement of third quarter interim management statement 5 November 2010
Statements containing the words: “believes”, “intends”, “expects”, “plans”, “seeks” and “anticipates” or other words of similar meaning are forward‑ looking. Forward‑looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group’s control. For example, certain insurance risk disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that have been estimated.
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward‑looking statements within the Annual Report & Accounts 2009. The Group has no obligation to update any of the forward‑looking statements contained within the Annual Report & Accounts 2009.
The Annual Report & Accounts 2009 has been prepared for the members of the Company and no one else. The Company, its directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the Annual Report & Accounts 2009 should be construed as a profit forecast.
ALM Asset Liability Management – Management of risks that arise due to mismatches between assets and liabilities.
Closed Life Fund A fund that is closed to 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.
Combined Code Standards of good corporate governance practice in the UK relating to issues such as board composition and development, remuneration, accountability, audit and relations with shareholders. The current version of the Code is the June 2008 edition.
CNHR Cost of residual non‑hedgeable risk – The expected cost of non‑hedgeable risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOG. This can include both financial risks and non‑financial risks such as mortality, persistency and expense risk.
GAO/GAR Guaranteed Annuity Option/Rate – An option or rate available to certain pension policyholders to acquire an annuity at a contractually guaranteed conversion rate.
GCO Guaranteed Cash Option – An option to convert an annuity benefit into cash on guaranteed terms.
ICA Individual Capital Assessment – A firm’s assessment of the amount of capital required to ensure that assets exceed liabilities 99.5% of the time over a one‑year period
IGD Insurance Groups Directive – Requires an EEA insurance Group holding company to prepare and submit to its regulatory supervisor a group capital adequacy calculation, assessing the level of insurance and financial risk and the resources available to cover the risk.
LIBOR London Inter‑Bank Offer Rate – Interest rate that banks charge each other for loans of varying short‑term maturities.
LTICR Long‑Term Insurance Capital Component – Capital required to be held for regulatory purposes in respect of investment, expense and insurance risks.
LTIP Long‑Term Incentive Plan – A reward system designed to improve employees’ long‑term performance.
MSA Management Services Agreement – A contract that exists between Phoenix Life and management services or between management services and their outsourced services providers.
PVFP Present Value of Future Profits – The present value of profits attributable to shareholders arising from the in‑force business.
Solvency II A fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a set of EU‑wide capital requirements and risk management standards that will replace the current Solvency I requirements.
TCF Treating Customers Fairly – A central FSA principal that aims to ensure an efficient and effective market and thereby help policyholders achieve a fair deal.
UKCPT UK Commercial Property Trust Limited – A property subsidiary of the Group which is domiciled in Guernsey and listed on the London Stock Exchange.
UKLA UK Listing Authority – The FSA acting as the competent authority for listing, is referred to as the UKLA, and maintains the official list.
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