The integration of both the AXA Wealth and Abbey Life businesses is ahead of plan with the Group exceeding its announced acquisition synergies. The Group has delivered £282 million of cash from AXA Wealth since the completion of the acquisition. Cash generation from the Abbey Life transaction is also on track with £236 million delivered this year. The recent experience gained from the integrations positions the Group to deliver significant value from the proposed Standard Life Assurance acquisition.
The Group has set a new, longer-term cash generation target of £2.5 billion between 2018 to 2022, replacing the previous 2016 – 2020 target. In addition, we expect a further £3.8 billion of cash generation from 2023 onwards. Although this illustrative cash generation after 2023 does not assume any additional management actions, it is a clear demonstration of the long-term cash flow potential of the Group.
With regard to contract-based workplace pensions, Phoenix Life’s Independent Governance Committee has published its second annual report. Given the unique set of circumstances surrounding this group of customers, Phoenix’s life company boards agreed that annual fees on workplace pension products should be reduced to 1% from the end of 2017. A £27 million impact from the fee reduction has been recognised in the Group’s results.
The Group’s corporate responsibility agenda plays a central part in the engagement of our people. This commitment extends to a number of community initiatives supported by the organisation and is a critical part of our overarching objective to put the financial, physical and mental wellbeing of our employees at the heart of our people strategy. I am pleased to report that staff-led fund raising activities in 2017 raised a total of over £160,000. This was raised primarily for our corporate partnerships with Midlands Air Ambulance Charity and London’s Air Ambulance.
ECONOMIC LANDSCAPE Investment markets showed positive returns in 2017, driven by an expectation of stronger global macro-economic growth.
The Meaning of Life 2 Report can be accessed at www.thephoenixgroup.com/media/ sponsored_report.aspx
Term assurance policies which pay a lump sum on death if death occurs within a specified period. Whole of life policies which cover the entire life and pay a lump sum on death, whenever it occurs.
– Measures have also been put in place to limit charges on workplace pension schemes to no more than 1%.
– Issuance of capital qualifying US$500 million of Tier 2 subordinated debt and £450 million of Tier 3 subordinated debt in 2017, allowed the Group to repay senior debt and fully repay the Group’s revolving credit facility, thereby providing additional capacity to fund future acquisitions.
ANALYSIS Our Solvency II surplus of £1.8 billion has increased due to surplus emergence, management actions undertaken during the period and the issuance of capital qualifying debt. This has been partly offset by the debt financing costs, pension contributions and dividend payments.
Please see the Alternative Performance Measure (‘APM’) note on page 200 for further details of this measure.
The Solvency II surplus excludes the surpluses arising in the Group’s unsupported withprofit funds and the PGL Pension Scheme of £0.6 billion (2016: £0.4 billion). In the calculation of the Solvency II surplus, the SCR of the with-profit funds and the PGL Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount. Surpluses that arise in withprofit funds and the PGL Pension Scheme, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.
As part of the ongoing simplification of the Group structure, Phoenix intends to put in place a new UK-registered holding company following the completion of the Standard Life Assurance acquisition. The new company will be the ultimate parent company and the highest EEA insurance Group holding company. When complete, the Solvency II capital assessment and Group supervision will be performed at this level.
SENSITIVITY AND SCENARIO ANALYSIS As part of the Group’s internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing1, are provided below and demonstrate the resilience of the PGH Solvency II surplus.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating companies in 2009. Following the acquisition of the AXA Wealth and Abbey Life businesses in 2016, a further £0.2 billion of acquired-in-force business and other intangibles have been recognised in the Group’s balance sheet.
Second line: Risk Oversight Risk oversight is provided by the Group Risk function and the Board Risk Committee. The Board Risk Committee comprises four independent Non-Executive Directors. It is supported by the Group Chief Risk Officer and met six times during 2017. During 2017, the Risk Committees of the Phoenix Life and Abbey Life Boards met five times and provided additional Board Committee focus on risk matters at Phoenix Life and Abbey Life.
The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group’s capital position. Since the introduction of Solvency II and a swaps-based discount rate, the Group is more sensitive to movements in swap yields.
The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions. The Group continues to actively manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite.
Go online for the Group’s full Corporate and Social Responsibility Report www.thephoenixgroup.com/CRreport2017 36 partners including charities, schools, hospices and local community groups.
Adherence to the Anti Bribery and Financial Crime policies is managed by the Financial Crime team via assessments of the minimum control standards that make up the policies as well as themed Financial Crime Reviews and Assurance testing.
The emissions reported are based on the main requirements of the ISO14064 Part 1 and the GHG Protocol Corporate Standard (revised edition). Data was gathered at meter level to compile the carbon footprint. The Government’s 2017 Conversion Factors for GHG Company Reporting have been used to convert energy data into carbon dioxide equivalent (CO2e) emissions.
Senior management conducted eight deal and non-deal related debt investor roadshows in the UK, Continental Europe and Asia, meeting circa 140 debt investors overall. In addition, the team held a non-deal group lunch in London on 2 October where Phoenix presented on its credit story and provided debt investors with the opportunity to meet with management.
CREDIT RATING AGENCIES AND BANKS Phoenix’s life companies and outstanding bonds have credit ratings by Fitch Ratings. The Group meets with the rating agency at least once per year for the annual ratings review. The Group Treasury Team and management last provided Fitch with an update in June 2017. The Group Treasury department and senior management also keep a constant dialogue with the Group’s relationship banks.
“Our Board is committed to keeping strong governance at the heart of our business, providing robust protection for our current and future shareholders and customers.” HENRY STAUNTON CHAIRMAN
The remuneration of the Directors is shown in the Directors’ Remuneration Report on pages 63 to 87. The terms and conditions of appointment of Non-Executive Directors are on the Group’s website. In accordance with the provisions of the Articles and the Code, all Directors (except Ian Cormack, who is standing down from the Board) will submit themselves for election or re-election at the Company’s AGM on 2 May 2018.
Non-Executive Directors 1 Karen Green and Belinda Richards were appointed to the Board on 1 July and 1 October 2017 respectively. 2 Isabel Hudson and David Woods resigned from the Board on 11 May 2017. 3 Ian Cormack did not attend two Board Meetings due to other unavoidable commitments.
– Approved the Group Internal Audit Proposition for 2018 and the continuation of the move from a static policy approach to a plan more focused on thematic audits based on emerging risks and topical matters.
– Pension measured as the full entitlement of 20% of base salary receivable either as a pension contribution or as cash, and ignoring the reduction to payments made in cash for employers’ national insurance contributions.
– Management Actions has been added as a new performance measure. Management Actions are those measures taken by management to increase cash generation and long-term value which are relatively insensitive to external factors and the natural unwind of the closed life assurance funds. Management Actions are a key performance indicator for the Group, tracked closely by management, the Board and investors to assess the success of management’s execution of our strategy. The total figure relating to Management Actions is published annually in the Annual Report and Accounts.
The weightings of the LTIP performance measures for 2018 are summarised below: Performance measure Weighting of performance measure
Overall the data shows minimal change in the level of remuneration for the Group Chief Executive; the small increase in annual incentive being due to a higher outcome under the Corporate element of the AIP. Staff more generally have experienced a small overall increase, due in part again to higher outcomes under the Corporate element of the AIP. The increase in taxable benefits reflects an increase in the cost of funding private medical insurance for eligible employees to maintain their same level of benefit. The median salary increase for staff was 2.25%; this is lower than the figures above which are based on averages.
• As Chairman of the Group’s Diversity and Inclusion (‘D&I’) Committee, promoting commitments under the Women in Finance Charter and spearheading the implementation of a programme of initiatives to help women achieve promotion to senior roles.
4 The 2014 LTIP award vested at 55% of maximum. 5 The face value of LTIP awards granted as nil cost options n in 2017 is £1,399,996 for Clive Bannister and £879,996 for James McConville. This represents the maximum vesting of awards granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of £7.881667p being the average of the closing middle market prices of Phoenix shares for the three dealing days preceding the award date. The vesting percentage at threshold performance (2017 awards) for Clive Bannister and James McConville is 25%.
The extent to which Executive Directors have achieved the requirements by 31 December 2017 (using the share price of 782.0p as at 31 December 2017) can be summarised as follows: Position
The table below shows the independent Non-Executive Directors who served on the Committee during 2017 and their date of appointment: Member From To
Performance measures – The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). The Remuneration Committee would expect to consult with its major shareholders if it proposed changing materially the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between these performance measures.
– The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the establishment of new board committees.
The Company will not tolerate bullying and harassment of any kind. All allegations of bullying and harassment will be investigated and, if appropriate, disciplinary action will be taken. The Company will also not tolerate victimisation of a person for making allegations of bullying or harassment in good faith or supporting someone to make such a complaint.
– whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
We determined materiality for the parent company to be £22 million (2016: £23 million), which is 2% (2016: 2%) of parent company equity. We have used a capital based measure for determining materiality for consistency with the approach taken for the Group where we consider equity to be the most appropriate basis when considering against other measures such as IFRS profit before tax with its inherent volatility considering the nature of the parent company as a holding company.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit: – in respect of fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management; and
A3.3 Income tax assets and liabilities Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. Forecasts of future profitability are made which by their nature involve management’s judgement.
A3.4 Pension scheme obligations The valuation of pension scheme obligations is determined using actuarial valuations that depend upon a number of assumptions, including discount rate, inflation and longevity. External actuarial advice is taken with regard to setting the financial assumptions to be used in the valuation. As defined benefit pension schemes are long-term in nature, such assumptions can be subject to significant uncertainty.
– Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) (Effective date to be determined).
The Company has chosen to report a non-GAAP measure of performance, being operating profit. Operating profit is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Company’s expected longer-term asset allocation backing the business).
Operating profit excludes the impact of the following items: – the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.2 and B2.3); – amortisation and impairments of intangible assets (net of policyholder tax); – finance costs attributable to owners; – gains or losses on the disposal of subsidiaries, associates or joint ventures (net of related costs of disposal); – the financial impacts of mandatory regulatory change; – integration, restructuring or other significant one-off projects; and
Basic earnings per share is as follows: 2017 pence 2016 pence
The value of the authorised share capital was translated at a historical rate. Issued and fully paid share capital transactions are translated at the rate prevailing at the date of issue.
On 1 June 2016, the Group completed an equity placing of 22,542,000 new ordinary shares in association with the acquisition of the AXA Wealth businesses which raised gross proceeds of £194 million. The proceeds from the equity placing, net of deduction of commissions and expenses, were £190 million.
D3.1 Perpetual Reset Capital Securities (‘the Notes’) On 25 April 2016 the coupon that was due on the remaining Notes was settled and Pearl Group Holdings (No.1) Limited redeemed the remaining £6 million of Notes at par.
3 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair value has been disclosed.
Also included within fixed and variable rate income securities are private placements, which are loans secured on various assets, with a value of £116 million (2016: £nil). The loans are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in the spread. An increase of 25bps would decrease the value by £2 million and a decrease of 25bps would increase the value by £2 million.
Also included within loans and deposits are investments in commercial real estate loans of £77 million entered into during the period. The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a proxy basket of asset backed securities. The valuation is sensitive to changes in the discount rate. An increase of 100bps in the discount rate would decrease the value by £5 million and a decrease of 100bps would increase the value by £5 million.
Financial assets designated at fair value through profit or loss upon initial recognition: Derivatives – 6
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of financial assets from Level 2 to Level 1 in the current period and from Level 1 to Level 2 in the comparative period.
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £466 million (2016: £820 million).
The maximum exposure to credit risk in respect of OTC derivative assets is £2,731 million (2016: £2,927 million) of which credit risk of £2,651 million (2016: £2,733 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).
A decrease of 1% in interest rates, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £196 million (2016: £319 million).
Where policyholders have valuable guarantees, options or promises in respect of the with-profit business, these costs are generally valued using a stochastic model.
Process used to determine assumptions Following the implementation of the Solvency II regulatory regime effective from 1 January 2016, the Group made certain changes to the assumptions and estimates used in the valuation of insurance contracts during the year ended 31 December 2016, as follows: – In determining the discount rate to be applied when calculating participating and non-participating insurance contract liabilities, the Group amended the risk-free reference curve from a gilt yield curve plus a liquidity premium of 10bps to the swap curve plus 10bps.
The assumption changes were made to align the IFRS basis more closely with the requirements of Solvency II removing the volatility that would otherwise arise from the use of reference rates that differ across reporting bases and aligning the calculation of liquidity premiums with that performed under Solvency II.
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 outsource partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
FCA thematic reviews provision On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life is subject to additional investigations. Specifically, the FCA is exploring whether remedial and/or disciplinary action is necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life is being investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review. The FCA has confirmed that these investigations have been commenced in order to enable the FCA to establish the reasons for the practices within firms and determine whether customers have suffered detriment as a result. No conclusion has been reached as to whether there have been any breaches of regulatory requirements. The commencement of investigations itself therefore cannot be taken to indicate that disciplinary action against Abbey Life will result nor does it indicate that a penalty will inevitably be imposed or that redress will be payable.
The Group has recognised a provision of £54 million as at 31 December 2017 (2016: £25 million) in relation to its best estimate of its obligations arising as a result of Abbey Life’s past practices in the areas covered by the two thematic reviews. Any resultant outflow of economic benefits is subject to uncertainty given the absence of final findings from the FCA review procedures, which would determine the extent to which the FCA may require Abbey Life to carry out remediation activities or impose financial penalties.
Deferred tax assets have not been recognised in respect of: Tax losses carried forward 37 25
Loss from changes in financial assumptions – (51) – – (51)
Obligations for repayment of stock lending collateral received (887) – (1,221) –
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed Minimum Pensions (‘GMP’) requirements. Legislation will be implemented following completion of the ongoing consultation on this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this change.
In 2016, an additional liability was recognised of £4 million reflecting a charge on any refund of the resultant economic surplus (prior to the elimination of insurance policies) that arose after adjustment for discounted future contributions of £10 million in accordance with the minimum funding requirement. A deferred tax asset of £2 million was recognised to reflect tax relief at a rate of 17% that was expected to be available on the contributions, once paid into the scheme.
The Charged Accounts are escrow accounts which were created in 2010 to provide the Trustees with additional security in light of the funding deficit. The amounts held in the Charged Accounts do not form part of Scheme assets.
On acquisition of AXA Wealth 10 38 – – 20 20 68
Impairment tests have been performed using assumptions which management consider reasonable. Given the magnitude of the excess of the value in use over carrying value, management does not believe that a reasonably foreseeable change in key assumptions would cause the carrying value to exceed value in use.
The Group has invested in a number of collective investment schemes such as Open-ended Investments Companies (‘OEICs’), unit trusts, Société d’Investissement à Capital Variable (‘SICAVs’) and private equity funds. These invest mainly in equities, bonds, property and cash and cash equivalents. The Group’s percentage ownership in these collective investment schemes can fluctuate according to the level of Group and third party participation in structures.
Phoenix & London Assurance Limited (dormant company) Wythall1 Ordinary shares 100.00%
For all LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards to Executive Committee members for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted. The fair value is adjusted in respect of the TSR performance condition which is deemed to be a ‘market condition’. The fair value of the 2016 and 2017 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below: performance condition performance condition –
The fair value of the awards has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model include expected share price volatility and expected dividend yield.
Own funds and SCR Basic Own Funds represents the excess of assets over liabilities from the Solvency II balance sheet adjusted to add back any relevant subordinated liabilities that meet the criteria to be treated as capital items.
Statement of Financial Position As at 31 December 2017 £m £m
Administrative expenses 27 54 1 In addition to the Non-Executive Directors, one employee was employed by Phoenix Group Holdings during the period (2016: one). Other Group employees are employed by other Group entities.
As part of the Group’s on-shoring plan the Board moved its tax residency from Jersey to the UK, effective from 31 January 2018. This change in residency was preceded by the Company waiving the outstanding balance on the Eurobonds with PGH (LCA) Limited, PGH (LCB) Limited, PGH (MC1) Limited and PGH (MC2) Limited on 29 January 2018.
The life companies had £10 million (2016: £46 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece and Spain, at 31 December 2017. The £3,255 million (2016: £3,906 million) total shareholder exposure to financial institution corporate debt comprised £2,648 million (2016: £2,125 million) senior debt, £2 million (2016: £2 million) Tier 1 debt and £605 million (2016: £1,779 million) Tier 2 debt.
This section provides additional analysis of PGH’s Solvency II Own Funds, SCR and MCR.
PGH’s Own Funds are analysed by Tier as follows: Estimated £bn
FREE SURPLUS The amount of capital held in life companies in excess of that needed to support their regulatory solvency capital requirement, plus the capital required under the Board approved capital management policy
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