2011 was the first complete year for Phoenix as a Premium Listed company and a FTSE participant. Details of the Board’s activities are contained in the Corporate Governance Report. I am pleased to report that an independent Board Evaluation undertaken towards the end of 2011 concluded that the Phoenix Board is functioning well and that the quality of the directors and the level of boardroom debate have improved substantially in the last two years.
Phoenix Group has enjoyed another year of successful delivery against our targets. We achieved our target range for cash flow generation, delivered substantial additional value through management actions and continued to delever the Group’s capital structure.
People Phoenix Group’s business model relies on having the necessary specialist expertise in closed life fund and asset management. This involves being able to recruit and retain people who have outstanding skills in areas such as capital, cost, risk and investment management. That we have such a team of individuals is a testament to the Group’s capability in recruitment, training and development, and employee engagement. This capability has now been externally recognised, with Phoenix being awarded the 2011 Strategic Communications Management (Melcrum) Award for Employee Engagement.
Phoenix Group Holdings Annual Report and Accounts 2011 policies to cash these in without penalty and benefit from the proceeds immediately. This initiative was a great success, with over 85% of customers involved in the scheme taking up this offer. Other similar initiatives are being considered for the remainder of 2012. A team of experts has been brought together within the life companies to review and enhance our investment strategy and governance. We also continue, where possible, to try to improve returns for our policyholders through the distribution of the estate within the life funds. As a result, certain maturity payouts are being enhanced in some of our funds by up to 12%.
Economic and industry overview As in 2010, financial markets in 2011 were volatile and global economic growth was subdued. Given the ongoing pressures in the Eurozone and, in particular, the high sovereign debt of many of its members, I expect this uncertainty to continue during 2012. Although Phoenix is not immune to further negative developments in the region, we have carefully managed our exposure to Peripheral Eurozone countries, reducing shareholder debt securities held in Peripheral Eurozone sovereign debt to £9 million. We are well positioned to react to further changes to ensure policyholder and shareholder investments are secure.
Phoenix Life manages these funds using its specific skills and expertise in the areas of capital, financial, risk and cost management.
Improve customer outcomes Improving customer outcomes is a key focus for Phoenix Life. During 2011, the Group concentrated on some specific
– Developing Advisors business – Harvesting revenues from joint ventures – Transforming operations. Increase Ignis brand recognition
The owners’ one‑ninth share of the policyholder with‑profit bonus of £69 million increased by £14 million on the 2010 result primarily due to higher terminal bonuses following an increase in maturities, and improved bonus rates.
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 £121 million (2010: £132 million). Amortisation of other intangible assets totalled £18 million in the period (2010: £18 million).
Group capital resources (‘GCR’) 5.6 5.3 Group capital resource requirement (‘GCRR’) (4.3) (4.3) IGD surplus (estimated) 1.3 1.0 £1.3bn IGD surplus (estimated)
– IT systems in Phoenix Life and Group will be updated, including video and teleconferencing facilities thus reducing the need for business travel. Our existing equipment will be re-used, recycled or disposed of via a registered ‘Waste Electrical and Electronic Equipment’ scheme.
Employee engagement Employee engagement helps drive business performance and so increases value for our policyholders and shareholders. Phoenix Group and Phoenix Life were short-listed for the Marketing Society’s Employee Engagement Award, and won the 2011 Strategic Communications Management (Melcrum) Award for Excellence in Employee Engagement, highlighting our success in this area. At time of going to print we are also delighted to report that Phoenix Group is one of ‘Britain’s Top Employers 2012’. This certification is awarded only to organisations that meet the highest standards in Human Resources policy benchmarking. The companies awarded with this certification have all been independently recognised as being amongst the best companies to work for in the UK.
Phoenix Life and Group returned an EEI of 78%, an increase of 1% on 2010, and for all questions, were at or above Financial Services Benchmark (or Private Sector Benchmark where a Financial Services comparison is not available). This was the second year that Ignis participated and its EEI increased from 60% to 68%.
For more information on Phoenix Group’s Corporate Responsibility programme, please contact corporateresponsibility@thephoenixgroup.com.
Tom Cross Brown Non-Executive Director Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management (which managed some €160 billion of assets, with offices in 30 countries around the world) from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the UK from 1997 to 2003. Prior to this, he spent 21 years with Lazard Brothers in London, latterly as Chief Executive Officer of Lazard Brothers Asset Management. Mr Cross Brown is Non-Executive Chairman of Just Retirement (Holdings) Limited and is a Non-Executive Director of Artemis Alpha Trust plc, as well as of other private companies and charities. Mr Cross Brown served on the Board of Directors of the former Pearl Group Limited from May 2005 until September 2009. He was appointed to the Board of Directors of the Company on 24 September 2009. He is Chairman of the Board Investment Committee and a member of the Board Nomination and Board Risk Committees.
– Establishing a Board Investment Committee in response to the Board evaluation undertaken at the end of 2010
Jonathan Moss resigned from the Board on 7 February 2011, having attended one Board meeting during 2011.
– Approve remuneration practices within Ignis, applying similar overall principles as applied to the rest of the Group but relating these to an appropriate peer group of asset managers.
Group MCEV Operating Earnings after Tax (‘GMCEVOEaT’) 30% Group Market Consistent Embedded Value (‘GMCEV’) 30% Operating Companies’ Cash Generation (‘OCCG’) 30% Expense Management (‘EM’) 10%
In 2011, fee levels were set at £450,000 for the Chairman of the Board, £90,000 for the role of Non-Executive Director with additional fees of: (i) £5,000 payable for the role of Senior Independent Director; and/or (ii) £10,000 payable where an individual also Chairs the Audit, Investment, Remuneration or Risk Committee; and/or (iii) £20,000 payable where a Non-Executive Director also sits on the Board of a subsidiary company. Non-Executive Directors in place in 2011, who are not paid for serving on subsidiary company Boards, had their fees unchanged at £100,000. In addition, David Woods receives a temporary fee (starting 1 July 2011) of £10,000 per annum for being a member of the Solvency II Model Governance Committee. No changes to these fee levels are proposed for 2012.
Share-based awards As at 31 December 2011, Directors’ interests under long-term share-based arrangements were as follows: Date of grant Share price on grant As at 1 Jan
Deferred Bonus Shares Date of award Shares awarded Share price on award Lapsed Outstanding Vesting date
Notes: This is the arrangement pursuant to which part of the annual incentive for any year is deferred into the Company’s shares.
Sharesave options held by Jonathan Moss lapsed on 29 March 2011.
St Helier, Jersey 22 March 2012 1 The Company’s home member state is the Netherlands as a result of its original listing on Euronext Amsterdam and is therefore governed by the Dutch Financial
Net income/(expense) attributable to unitholders 131 (97) Total operating expenses (6,243) (7,263)
Investment return variances and economic assumption changes on long-term business 5 (338) 18 Variance on owners’ funds 5 9 19 Amortisation of acquired in-force business (121) (132) Amortisation of customer relationships (18) (18) Non-recurring items 4.2 14 (139) (Loss)/profit before finance costs attributable to owners (67) 121
Shares held by the employee trust and group entities (note 17)
Dividends paid on ordinary shares – (34) (20) – – – (54) – (54) Dividends paid to non-controlling
There are no differences between the measurement of the assets and liabilities reflected in the primary statements and that reported for the segments. A reconciliation between the reported segment revenues and expenses and the Group’s revenues and expenses is shown in note 4.
– IAS 28 Investments in Associates and Joint Ventures (Revised) (2013). This standard supersedes IAS 28 Investments in Associates and prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
Net premiums written from: External customers 1,449 – – – 1,449 Other segment – – – – –
Financing costs attributable to owners – – (110) (110) Segment result before the tax attributable to owners (75) 39 (141) (177)
– an increase in the expense reserves of Phoenix Life of £23 million following the new fee arrangement between Phoenix Life and Ignis Asset Management. Ignis Asset Management will recognise the benefit of this new arrangement as it is earned and so this charge will reverse over time.
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because, due to their exercise price, they did not have a dilutive effect for the periods presented: – 5 million warrants issued to the Lenders on 2 September 2009; – 12.36 million warrants issued to Royal London on 2 September 2009; and
18. Share-based payment (continued) 18.2 Share-based payment schemes in issue Long-term incentive plan (‘LTIP’) In 2009, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in embedded value and cumulative cash generation over a three year period. There are no cash settlement alternatives. The 2009 LTIP awards vested in 2010. Further awards were made in 2010 which will vest on 28 May 2013 and in 2011 which will vest on 12 April 2014.
The following information was relevant in the determination of the fair value of the 2010 SAYE and 2011 SAYE awards in the year: Share price (p) 669.5 650.0 Exercise price (£) 5.72 5.63 Expected life (years) 3.25 and 5.25 3.25 and 5.25 Risk-free rate (%) 1.8 (for 3.25 year scheme) and 2.6
LIBOR plus a variable margin of 0.50% to 0.60% per annum. The lender holds a floating charge over certain assets of UKCPT and its subsidiaries. The repayment date for this facility is 19 June 2015. This facility was fully utilised during 2011 in order to increase UKCPT’s property portfolio.
The IPO warrants are listed and were previously valued using the warrant price quoted on the LSE for the Company. Due to the relatively low number of IPO warrants in issue, they are thinly traded and the quoted price is not considered to be the best indicator of their fair value. As a result the IPO warrants have been valued using an extended Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2011 are as follows: – share price as at 31 December 2011 of £5.25; – volatility of 30%; – the warrants are not adjusted for dividends; and
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2011, 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 cumulative net actuarial gains recognised in other comprehensive income amount to £148 million (2010: £67 million).
The change in the fair value of the scheme assets is as follows: £m
In accordance with an agreement dated November 2005, certain of the Group’s with-profit funds have indemnified the Group’s owners in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. Completion of the triennial valuation in 2010 resulted in a recovery from the with-profit funds of £37 million, together with interest, in respect of the balance due in relation to the cost of changes in longevity assumptions determined by the previous triennial valuation. Accordingly a contribution in respect of actuarial losses was made by the with-profit funds of this amount, less tax, resulting in £27 million being recognised in the consolidated statement of comprehensive income in 2010.
The useful lives of plant and equipment have been taken as follows: motor vehicles 3–4 years, computer equipment 3–4 years, furniture and office equipment 5–10 years.
The fair value of loans and receivables at amortised cost amounted to £3,494 million (2010: £2,320 million).
Where the Group receives collateral in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of the collateral received. The amount recognised as a financial asset and a financial liability at 31 December 2011 is £10,823 million (2010: £9,222 million) and £10,916 million (2010: £9,339 million) respectively.
Where the Group receives collateral in the form of marketable securities which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for OTC derivatives and reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £371 million and £2,089 million respectively (2010: £313 million and £1,898 million).
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 £11,387 million (2010: £8,545 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
2 Regulatory adjustments to liabilities primarily reflect differences between the realistic valuation basis for the with-profit business used in calculating owners’ funds on an IFRS basis, and the regulatory valuation basis used to calculate the FSA peak 1 capital resources.
43.3 Financial risk analysis Transactions in financial instruments may result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages them.
In the non-participating funds, policy liabilities are duration matched with primarily fixed and variable rate income securities, with the result that sensitivity to changes in interest rates is very low. For unit-linked funds the risk is limited to the extent of the management fees generated by the Group.
Net asset value attributable to unitholders 1,937 – – – 1,937 Obligations for repayment of collateral received 9,532 122 506 – 10,160 Reinsurance payables 25 – – – 25 Payables related to direct insurance contracts 673 40 – – 713 Accruals and deferred income 205 9 – – 214 Other payables 327 – – – 327
PA (GI) Limited (general insurance company) UK Ordinary shares of £0.01 deferred shares of £0.25
‘C’ ordinary shares of £1 and ‘D’ ordinary shares of £1
2 Includes assets where policyholders bear most of the investment risk. In the second half of 2011 two with-profit funds moved from ’Participating supported’ to ‘Participating non-supported’ as they no longer require shareholder support.
Cash and cash equivalents 2,650 2,144 5,441 1,007 11,242 Debt securities – gilts 2,974 4,632 7,742 891 16,239 Debt securities – bonds 7,127 5,355 7,783 885 21,150 Equity securities 401 818 6,621 8,438 16,278 Property investments 153 132 887 339 1,511 Other investments1 799 586 1,895 12 3,292 As at 30 June 2011 14,104 13,667 30,369 11,572 69,712 1 Includes repurchase loans of £1,772 million, policy loans of £17 million, other loans of £30 million, net derivatives of £509 million and other investments of £964 million.
At 31 December 2011, the life companies had £9 million shareholder exposure to sovereign debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece and Spain. This exposure has been reduced from £161 million at 30 June 2011. This reduction of £152 million reflects a decision to dispose of Peripheral Eurozone sovereign debt in certain funds and also includes £40 million arising from the reclassification of two with-profit funds from ‘Participating supported’ to ‘Participating non-supported’.
The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the UK corporate tax rate of 26.5% (31 December 2010: 28%).
Operating MCEV earnings (after tax) 409 13 34 (62) 394 Non-operating MCEV earnings (after tax) (322) 15 (1) (55) (363)
The market consistent value of in-force business represents the present value of profits attributable to shareholders arising from the in-force business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts and frictional costs of required capital.
Capital and dividend flows (738) (62) (800) Life MCEV at 31 December 2011 1,175 2,629 3,804 1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long-term risk-free rate.
MCEV/ Premium 5. Maturity profile of business This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projected on a certainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted at risk-free rates.
The information booklet will give guidance regarding how shareholders may elect to take up the scrip dividend alternative. Such elections must be received by the Company’s registrar by 5pm on 25 April 2012.
More detailed information on this or similar activity can be found on the FSA website available at www.fsa.gov.uk/pages/consumerinformation.
BSP Bonus Share Plan – A share incentive legacy plan which operated before the Company’s shares were admitted to the LSE. No further awards will be made under this plan
MCEV Market Consistent Embedded Value – A measure of the consolidated value of shareholders’ interests calculated using the Group’s MCEV methodology as described in note 1 of the MCEV supplementary information
Value of Financial Options and Guarantees (TVFOG) less the Frictional Cost of Required Capital (COC)