We now have an executive team in situ that is well equipped to lead the Group through the next phase of its development.
Phoenix Group is financially strong and strategically well positioned. the Board wishes to thank all of our colleagues throughout the Group who have produced such good results for 2010 and upon whose efforts we rely for success in the future.
“ Phoenix Group has taken major strides forward in 2010. We set a clear focus on the most important tasks – and we delivered on them all. We have proved that the Phoenix business model works.”
Clive Bannister Group Chief Executive Officer 05 Phoenix Group Holdings Annual Report and Accounts 2010
Customers and brand treating Customers Fairly (‘tCF’) is not just an FSA requirement, but something that characterises the ethos of our business and which is central to everything we do. As with all retail financial services companies, we bear a heavy responsibility to keep our customers’ savings safe, to treat them with respect and to give our all in pursuit of better returns. It is a heavy responsibility, but also an exhilarating challenge and one that Phoenix and IGNIS are well equipped to meet.
Phoenix Group Holdings is also the parent company of Opal Re, a reinsurer based in Bermuda. Opal Re provides reinsurance solely to Phoenix life to support the diversification of risk on annuity books.
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 below.
By bringing together our specialisms of closed fund management and asset management, and responding to the views of our policyholders, we find innovative ways to improve the performance of funds.
– Maintain our market presence to ensure visibility of potential opportunities.
We are committed to maintaining this level of employee engagement in 2011.
The Board considers that IFRS operating profit is a more representative measure of performance than IFRS profit before tax as it provides long-term performance information and gives an insight into the Group’s ability to generate cash flows to support dividends1: analysis: The IFRS operating profit of £373 million reflects a strong performance from both the Group’s operating segments. The reduction compared to the prior year is due to the 2009 Phoenix Life operating profit benefiting from favourable longevity assumption changes of £139 million.
IGD capital policy: The Group maintains group capital resources at the PLHL level at an amount in excess of 105 percent of the with-profits insurance capital component (‘wPICC‘), an additional capital requirement of with-profit funds, plus 145 percent of the group capital resource requirement less the wPICC.
Definition and calculation: IGD Excess Capital includes policyholder and certain shareholder capital currently excluded under FSA rules from the calculation of IGD surplus at the PLHL level and is explained on page 43.
Definition and calculation: Gearing is calculated as net shareholder debt3 divided by the sum of Group MCEV, net shareholder debt and the present value of future profits of IGNIS.
The Group has delivered cash flows from its operating subsidiaries of £734 million, including cash flows of £242 million from value enhancing management actions. Accelerated cash flows were achieved through improved asset liability matching, investment portfolio derisking, the resolution of legacy tax issues and fund restructurings.
Cash and cash equivalents at 1 January 202 86 Operating companies’ cash generation Cash receipts from Phoenix Life2 708 695 Cash receipts from IGNIS Asset Management 26 21 Total receipts of cash by Holding Companies3 734 716 uses of cash Recurring cash outflows Pension scheme contributions 38 33 Other operating expenses 45 27 Debt interest 123 102 Shareholder dividend 43 – Debt prepayment 122 – Total recurring outflows 371 162 Non-recurring cash outflows IT and other business transformation costs 30 67 Transaction and restructuring costs 35 30 Settlement with Royal London – 240 Debt interest 6 72 Pension scheme contributions – 25
The Board is pleased to report that embedded value performance was strong reflecting the resilience of Phoenix Life and the realisation of significant value from management actions. The Group has delivered growth in embedded value from management actions of £296 million, exceeding the 2010 target of £145 million.
3 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns.
3 Revenues are stated net of rebates from collective investment schemes.
Third party net sales were £1.3 billion (2009 pro forma: £0.4 billion) for the year reflecting strong sales of liquidity funds and retail products.
Group operating profit – IfrS The Group has delivered a strong performance, generating an IFRS operating profit of £373 million (2009 pro forma: £457 million), demonstrating both its ability to deliver high quality returns for shareholders and the strength of its business model.
At 31 December 2010 the IGD Excess Capital was £2.8 billion (2009: £3.1 billion) as shown below: £bn £bn
Leverage In managing capital the Group seeks to optimise the level of debt in its balance sheet. The Group’s closed book business model allows it to operate with higher leverage than other life companies that are still writing new business, as it does not need to fund upfront capital requirements and new business acquisition expenses.
Shareholder debt (including hybrid debt) at 31 December 2010: 2010 £m 2009 £m
The Human Resources function has continued to monitor employee metrics around turnover, sickness and training during 2010. Whilst the turnover figures for employees leaving voluntarily (see table below) are up on previous years’ values, they are better than the industry benchmark of 11.9 percent. The 2009 figure for voluntary leavers was lower, though this may have been due to the extensive redundancy programme being operated as a result of the integration of our Life Company Glasgow and Peterborough offices into Wythall.
We set out to maintain and improve customer outcomes during 2010. One example of this is that we have improved the cycle of mailings for one million customers. They now receive their communications three months earlier than previously, following our bonus declaration announcement. This helps provide our customers with information in a timely manner, allowing them sufficient time to make informed decisions.
Paid interim dividend of 21p per share (last year nil) Recommended final dividend of 21p per share (last year pro rata €0.171 per share) Total ordinary dividend of 42p per share (last year pro rata €0.171 per share)
The Articles give details of the circumstances in which a Director will be treated as having automatically vacated their office and also state that the Company’s shareholders may remove a Director from office by passing an ordinary resolution.
substantial shareholdings Information provided to the Company pursuant to the Financial Services Authority’s Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company’s website. As at 28 March 2011, the Company had been notified of the following significant holdings of voting rights in its shares.
7 Isabel Hudson was appointed to the Board on 18 February 2010.
8 David Woods was appointed to the Board on 18 February 2010.
Pension The Executive Directors (as at the date of this report) receive a contribution equal to 20 percent of base salary to a defined contribution pension arrangement. Jonathan Moss received a contribution equal to 11.7 percent of base salary (up to a maximum earnings limit of £123,600) and Simon Smith participated in the Group’s defined benefit arrangement until he ceased to be employed by the Group.
25 percent of the cash generation component of the award will vest for cumulative cash generation of £1.375 billion rising on a pro rata basis until 100 percent vests for cash generation of £1.655 billion.
Annual Incentive Plan 150% of base salary (reduced pro-rata for 2011 service), with one-third of any payment deferred into shares for three years LTIP 200% of base salary (with the first award to be granted in April 2011) Pension 20% of base salary Share ownership guidelines 200% of base salary to be achieved through the retention of all post-tax shares which vest under the LTIP (or any other discretionary arrangement introduced in the future)
Shares granted Shares vested Shares lapsed as at 31 Dec 2010 vesting date
Policyholder claims (5,260) (2,043) Less: reinsurance recoveries 210 105 Change in insurance contract liabilities (252) 1,137 Change in reinsurers’ share of insurance contract liabilities 89 142 Transfer to unallocated surplus 21 (143) (175) net policyholder claims and benefits incurred (5,356) (834)
Add/(deduct): tax attributable to policyholders’ returns 13 5 (60) Tax credit/(charge) attributable to owners 13 74 (16) Profit for the year attributable to owners 80 135 attributable to: Owners of the parent 30 95 Non-controlling interests 19 50 40 earnings per ordinary share Basic earnings per ordinary share 15 20.1p 102.9p Diluted earnings per ordinary share 15 20.1p 89.8p
The analysis of pro forma profit attributable to owners for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four month post-acquisition period only.
equity attributable to owners of the parent Share capital 16 − − Share premium 1,109 859 Other reserves 5 257 Shares held by employee trust and group entities 17 (13) (4) Foreign currency translation reserve 93 93 Retained earnings 386 207 total equity attributable to owners of the parent 1,580 1,412
cash flows from investing activities On acquisition of the Pearl businesses 41.2 − 6,146 Purchase of property, plant and equipment (3) − Interest received − 2 Net change in cash invested in trust account − 591 net cash flows from investing activities (3) 6,739 cash flows from financing activities Gross proceeds from issue of share capital 33 − Repayment on redemption of shares − (41) Proceeds from issuing shares in subsidiaries to non-controlling interests 96 − Repurchase of shares in subsidiaries from non-controlling interests − (3) Partial buy back of non-controlling interests (4) − Proceeds of new borrowings − 42 Ordinary share dividends paid (43) − Coupon on Perpetual Reset Capital Securities paid (62) − Dividends paid to non-controlling interests (18) (8) Interest paid on borrowings (122) (221) Repayment of borrowings (165) (110)
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.
Unallocated surplus The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group’s life operations. For the Group’s with-profit funds, the amount included in the statement of consolidated financial position line item ‘Unallocated surplus’ represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts. The with-profit funds are closed to new business and as permitted by IFRS 4, the whole of the unallocated surplus has been classified as a liability (either within insurance contract liabilities or unallocated surplus).
(q) Investments in associates and joint ventures Investments in associates and joint ventures that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Interests in Associates and IAS 31 Interests in Joint Ventures. These are measured at fair value through profit or loss. There are no investments in associates and joint ventures which are of a strategic nature.
2. Financial information The consolidated financial statements for the year ended 31 December 2010, set out on pages 88 to 169, were authorised by the Board of Directors for issue on 28 March 2011. The financial statements have been prepared in accordance with IFRS adopted for use by the EU and also in accordance with Part 9, Book 2, of the Netherlands Civil Code.
In addition, the following standards, interpretations and amendments have been issued but are not currently relevant to the Group: – IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (2011). – Classification of Rights Issues (Amendments to IAS 32) (2011). – Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14) (2011). – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1) (2012).
Operating profit/(loss) before adjusting items 285 14 (17) − 282 Investment return variances and economic assumption changes on long-term business 145 − − − 145 variance on owners’ funds 9 − (79) − (70) Amortisation of acquired in-force business (45) − − − (45) Amortisation of customer relationships (6) (1) − − (7) Non-recurring items (101) (4) − − (105) Financing costs attributable to owners − − (49) − (49) Segment result before the tax attributable to owners 287 9 (145) − 151
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 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.
22. Borrowings carrying value Fair value 2010 £m 2009 £m 2010 £m 2009 £m £4 million loan (note f) 4 − 4 −
During January 2010, the remaining Founders’ warrants in issue were converted into ordinary shares. On 5 July 2010, the IPO warrants were admitted to trading on the London Stock Exchange. The IPO warrants were subsequently delisted from Euronext on 17 November 2010.
Trading losses 82 28 Expenses and deferred acquisition costs carried forward 86 142 Provisions and other temporary differences 20 30 Pension scheme deficit 21 34 Accelerated capital allowances 25 24 Unpaid interest 82 45 Gross deferred tax assets 316 303 Less: offset against deferred tax liabilities (316) (222) net deferred tax assets − 81 130 Phoenix Group Holdings Annual Report and Accounts 2010
The actual return on the scheme assets comprises the following: 2010 £m 2009 £m
Customer relationships The customer relationships intangible includes an intangible representing vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies. The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the Phoenix Life segment. This intangible is being amortised over a 20 year period.
PVFP on non-participating business in the with-profit fund The value of the PvFP is determined in accordance with the FSA’s realistic capital regime and is allocated in full to the Phoenix Life segment. The principal assumptions used to calculate the PvFP are the same as those used in calculating the insurance contract liabilities given in note 43.5.1.
Direct operating expenses (included within administrative expenses) in respect of investment properties that generated rental income during the year amounted to £2 million (2009: £8 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £2 million (2009: £3 million).
Financial liabilities designated at fair value through profit or loss upon initial recognition Investment contract liabilities − 8,849 − 8,849
37. Financial instrument fair value hierarchy (continued) 37.4 Significant transfers of financial instruments between Level 1 and Level 2
The Group continued to see an improvement in the liquidity of the fixed and variable rate securities market throughout 2010 and 2009, which has resulted in a number of securities moving from Level 2 into Level 1. There were however, a number of securities that moved from Level 1 to Level 2 as a result of a downgrading in their credit rating. These securities were mainly in the financial sector with issuers such as banks and insurance companies.
Pearl Pacific fund – the owner attributed assets, known as the Pacific fund, are held within the surplus of the 0:100 fund of Pearl and are attributable to owners. The assets can only be released when, in the opinion of the Actuarial Function Holder and the Board, to do so would not adversely affect either the reasonable expectations of with-profit policyholders or the security of non-profit policyholders.
Management actions The management actions that have had the most significant impact on available capital resources of the Phoenix Life segment of the Group during the period to 31 December 2010 generally comprise payment of dividends to group entities.
Responsibility for agreeing the financial risk profile rests with the Board of each life company, as advised by investment managers, internal committees and the actuarial function. In setting the risk profile, the Board of each life company will receive advice from the appointed investment managers and the relevant actuary as to the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the regulatory minimum capital requirement. The actuary will also advise the extent to which the investment risk taken is consistent with the Group’s commitment to treat customers fairly.
A 10% increase in property prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year and in equity of £51 million (2009: £21 million).
Net asset value attributable to unitholders 946 − − − 946 Obligations for repayment of collateral received 3,054 158 412 484 4,108 Reinsurance payables 17 − − − 17 Payables related to direct insurance contracts 693 66 − − 759 Accruals and deferred income 174 3 − − 177
Mutual Securitisation plc (finance company) ROI Quasi subsidiary NP Life Holdings Limited (holding company) UK ‘A’ ordinary shares of £1 and
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 10 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 focused 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
No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO Forum principles and guidance does not anticipate further risk management actions and therefore does not provide a fair reflection of the Group’s ongoing risk.
The time value of options and guarantees used in the calculation of MCEV also allows for expected management action and policyholder response to the varying external economic conditions simulated by the economic scenario generators. Policyholder response has been modelled based on historical experience. Management actions have been set in accordance with each life companies’ Principles and Practices of Financial Management.
The net worth of covered business of £1,770 million at 31 December 2010 (2009: £2,234 million) consists of £670 million of free surplus in excess of required capital (2009: £408 million). This does not include the IFRS net assets of management services of £80 million (2009: £56 million) as shown in the free surplus reconciliation for Phoenix Life on page 32.
Real interest rates have been modelled using the two-factor Vasicek model, calibrated to index-linked gilts
The voting results for our 2011 AGM, including proxy votes withheld will be available on our website shortly after the meeting at the following address: www.thephoenixgroup.com
Shareholder profile as at 31 December 2010 Analysis of shareholders no. of shareholders % no. of shares %
Annual General Meeting 13 May 2011 Announcement of first quarter interim management statement 16 May 2011 Announcement of unaudited six months’ interim results 25 August 2011 Announcement of third quarter interim management statement 8 november 2011 ordinary shares – 2010 final dividend Ex-dividend date 6 April 2011 Scrip calculation period 6–12 April 2011 Scrip mandate forms issued 8 April 2011 Record date 8 April 2011 Scrip election date 26 April 2011 Payment date for the recommended final dividend 17 May 2011 forward looking statements The 2010 Annual Report and Accounts contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives. Statements containing the words: ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’, ‘targets’, ‘continues’ 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 we have estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: – Domestic and global economic and business conditions – Asset prices – Market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally – The policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements – The impact of inflation, and deflation – Market competition – Changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates) – The timing, impact and other uncertainties of future acquisitions or combinations within relevant industries – Risks associated with arrangements with third parties, including joint ventures – Inability of reinsurers to meet obligations or unavailability of reinsurance coverage – The impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.
EIoPA European Insurers and Occupational Pensions Authority – the Committee is composed of high-level representatives from the insurance and occupational pensions supervisory authorities of European Union member states and is currently consulting with the industry on the technical requirements of Solvency II.
The UK’s independent regulator responsible for promoting confidence in corporate governance and reporting.