STRATEGIC REPORT What we do ������������������������������������������������� 2 The Phoenix Group timeline ������������������������ 4 Chairman’s Statement ��������������������������������� 6 Group Chief Executive Officer’s Report ������������������������������������������� 8 Cash ����������������������������������������������������������� 12 Resilience ��������������������������������������������������� 14 Growth ������������������������������������������������������� 16 Our Markets ����������������������������������������������� 18 Our Operating Structure ���������������������������� 22 Our Key Products �������������������������������������� 23 Our Business Segments ��������������������������� 24 Our Business Model ���������������������������������� 26 Our Strategy and KPIs ������������������������������� 30 Business Review ��������������������������������������� 38 Risk Management ������������������������������������� 48 Reporting Statements ������������������������������� 58 Stakeholder Engagement �������������������������� 60
GROUP ASSETS UNDER ADMINISTRATIONAs the largest life and pensions consolidator in Europe, Phoenix is focused on the acquisition and management of closed life insurance and pension funds� This is our Heritage business�
We continued to make strong progress across all phases of the Standard Life Assurance transition programme and announced an enlarged partnership with leading technology and service provider TCS� This strategic partnership will enable us to deliver a hybrid end state Customer Services and IT operating model built on strong innovation and designed to deliver excellence in customer service�
Today, we have announced a new one-year cash generation target range for 2020 of £800 to 900 million and we remain on track to deliver our five-year target for 2019 to 2023 which has been “upgraded” for the impact of 2019 new business to £3�9 billion�
04. BE A GOOD CORPORATE CITIZEN We aim to be a diverse, engaged and enabled workforce and good corporate citizen in the communities in which we are based.
We have already raised part of the debt financing through the issue of a $750 million Subordinated Restricted Tier 1 bond in January 2020�
During his tenure he significantly strengthened Phoenix’s balance sheet, obtained an Investment Grade Rating for the Group, established an unbroken record of delivering on financial targets, and helped deliver transformative acquisitions�
MANAGEMENT SERVICES COMPANIES The Group’s management services companies are charged with the efficient provision of financial and risk management services, sourcing strategies and delivering all administrative services required by the Group’s life companies� This benefits the life companies by providing price certainty and transferring some operational risks�
Outsource partners The management services companies manage relationships with the outsource partners for our Life business� Without further acquisitions, the number of policies in our Heritage business declines over time and the cost of our Heritage operations as a proportion of policies will increase� This risk is managed by paying a fixed price per policy to our outsource partners for policy administration services, which reduces this fixed cost element of our operations and converts it to a variable cost structure�
Policyholders’ benefits are in the form of unit price growth (based on the investment income and gains, but subject to management charges and investment transaction costs)�
Our retail pensions business comprises a range of products across both the accumulation and decumulation stages of the life savings cycle� Within retail, new business is driven by customers opting for draw down products and consolidating their pension pots in one place�
In 2019 we launched a new variant of the Offshore Bond, featuring Capital Redemption to enhance the International Bond offering�
Management actions These can either increase Own Funds or reduce capital requirements�
ANY ASSETS WHICH THE LIFE COMPANIES HOLD IN EXCESS OF OVERALL CAPITAL BUFFERS REQUIRED ARE KNOWN AS FREE SURPLUS
• Extend our drawdown capability across the Group so more customers can access their pension benefits in a flexible way, such as offering Standard Life’s non-advised drawdown to Phoenix Life customers, and allowing Workplace members to access their pension benefits within their scheme�
Furthermore, there are significant opportunities to increase and accelerate cash flows through the delivery of management actions across four key areas: operational management, risk management, restructuring and effective partnerships�
KEY INITIATIVES AND PROGRESS IN 2019 • Capital synergies associated with the acquisition of the Standard Life Assurance businesses benefited the Group Solvency II surplus by £145 million primarily as a result of intra-group restructuring which improved the capital efficiency of the Group�
• Complete delivery of the funding for the acquisition of ReAssure Group, the first step of which was the issuance of the capital qualifying $750 million Restricted Tier 1 bond in January 2020�
Our Strategy and KPIs continued 34 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Debt interest of £112 million (2018: £88 million) increased principally as a result of the annual coupon payment on the £445 million (€500 million) Tier 2 bond issued in September 2018�
Group AUA Group AUA increased to £248�3 billion in the year (2018: £226�3 billion) benefiting from positive market movements, notably strong performance in global equity markets, and net inflows from the Group’s UK Open business; partly offset by net outflows from the Group’s Heritage businesses�
UK Heritage net flows UK Heritage net outflows of £(6�0) billion (2018 pro forma1: £(7�1) billion) reflect policyholder outflows on claims such as maturities, surrenders and annuities in payment, net of total premiums received in the period from in-force contracts�
Gross inflows in the Wrap product of £3�0 billion (2018 pro forma1 : £4�1 billion) were adversely impacted by challenging market conditions, notably market uncertainty arising from Brexit combined with a decline in transfers from defined benefit to defined contribution pension schemes�
Retail products experienced gross inflows of £1�9 billion (2018 pro forma1: £2�1 billion)�
IFRS profit after tax The IFRS profit after tax attributable to owners is £116 million (2018: £410 million)� The decrease primarily reflects net negative economic variances arising on hedging positions held by the life companies to protect the Group’s Solvency II surplus position, compared to net positive variances in the prior year together with a full year’s amortisation charge on intangibles arising on acquisition of the Standard Life Assurance businesses� The 2018 result also included a £141 million gain recognised on the acquisition of the Standard Life Assurance businesses� These negative factors have been partly offset by the improved operating profit detailed above�
The with-profit funds where internal capital support has been provided generated an operating profit of £18 million (2018: £20 million)� The profit is principally driven by the net positive impact of updating actuarial assumptions, including longevity�
The Group continues to actively monitor and take action against potential financial and operational impacts due to the spread of COVID-19�
Cash flow – The Group and each Life Company will seek to ensure that it has sufficient cash flow to meet its financial obligations under a range of Board-approved scenarios�
Shareholder value – The Group only has appetite for risks that are rewarded, understood and controlled, and consistent with the Group’s strategy� The Group will take action to grow and protect shareholder value�
The distinction between a risk and an emerging risk predominantly relates to the time horizon, with emerging risks generally being medium to longer term in nature� In many cases the potential impact for the Group is not yet clear and may change over time�
The Group captures emerging risks, and emerging opportunities, in a dashboard covering potential likelihoods, timeframes and impacts�
The Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations�
It is expected that these disclosures will continue to evolve as the Group moves towards full alignment by 2022 in line with the recommendation of the UK Government’s Green Finance Strategy�
Sustainability Committee In 2019, the Group established a Sustainability Committee, which comprises key functional representatives from across the business and is led by a newly appointed Head of Sustainability�
SECTION 172 STATEMENT The Directors are mindful of their duty to promote the success of the Company� They believe they have acted in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole� The table opposite shows where more information can be found on the matters referred to in the Companies Act Section 172 (1)�
A number of activities were focused on enhancing customer experience, for example vulnerable customer support and retirement event invites�
REWARD The Group continues to attract, develop and retain talented individuals by offering a competitive range of benefits and development opportunities� The Group is in discussions with the Living Wage Foundation to understand in more detail the requirements to gain full accreditation as a Living Wage Employer� The Group has been paying at least the Real Living Wage to colleagues since 2014�
GREENHOUSE GAS EMISSIONS AND ENERGY CONSUMPTION DISCLOSURE This section includes an update on the Group’s annual energy consumption and greenhouse gas emissions for the calendar year 2019 and the prior year, 2018� Emissions disclosed relate to facilities, activities and property investment portfolios where the Group has operational control�
As a major employer in Scotland, the Group became a signatory to the Scottish Business Pledges during the year, a voluntary initiative between the Scottish Government and business to help build a fairer Scotland� Key elements include paying the Living Wage and a commitment to investing in a skilled and diverse workforce�
“Strong governance must remain a bedrock for the Group as we continue to grow as a FTSE 100 company, with the aims of both protecting our customers and shareholders and enhancing our performance.”
EVOLUTION OF BOARD FOCUS As well as the continual focus of the Board on strategy and performance, the Board has increased its activity in 2019 on the important topic of Environmental, Social and Governance (‘ESG’) matters and the Group appointed its first Head of Sustainability� The Board will continue to increase its activity in this sphere� The Board also reviewed the Group’s culture and values in 2019 appropriately focusing on these matters as central to how the Group operates to the benefit of customers, shareholders and our colleagues� Details of how the Board engaged with Phoenix’s various stakeholders in accordance with section 172 of the Companies Act 2006 are included in the Corporate Governance Report on pages 82 to 83�
Andy Briggs was appointed Group Chief Executive Officer (designate) of the Company on 1 January 2020� Mr Briggs has over 30 years of insurance industry leadership experience and is a qualified actuary� He was Group Chief Executive of Friends Life, the listed insurer, Managing Director of Scottish Widows, Chief Executive of the Retirement Income division at Prudential and Chairman of the ABI� Most recently he was CEO UK Insurance of Aviva plc until April 2019� He is a Trustee and Chair of the Income Generation Committee of the NSPCC and also serves as the UK Government’s Business Champion for the Ageing Society�
Experience: Wendy Mayall has over 30 years of asset management experience, including as Group Chief Investment Officer and later consultant at Liverpool Victoria from 2012 to 2015, having previously been Chief Investment Officer for Unilever’s UK pension fund from 1996 to 2011 and holding management responsibility for Unilever’s pension funds globally� From 2006 to 2009, Ms Mayall was the Chair of the Investment Committee of the Mineworkers Pension Scheme, a British government appointment to one of the largest government backed pension schemes in the UK� Ms Mayall is a Non-Executive Director of Old Mutual Wealth Oversight Council� She is also the Senior Independent Director and Audit Committee Chair of Fidelity Investments Life Insurance Company and Chair of the Funding Committee for TPT Retirement Solutions�
Experience: Nicholas Shott is an investment banker, who has been European Vice Chairman of Lazard since 2007 and Head of UK Investment Banking at Lazard since 2009� Mr Shott joined Lazard in 1991 and became a partner in 1997� He is also a Non-Executive Director on the Board of the Home Office�
Board, other Group company boards, ExCo and senior management; • Oversees and co-ordinates maintenance of, and adherence to, appropriate corporate governance procedures across the Group; • Designs and implements a framework to manage legal risk within the Group, including compliance by Group companies and staff with relevant legal obligations; and
1� CEO report Strategy, performance, governance and regulatory review 2� Strategy and planning Strategic and operational planning, consideration of corporate transactions 3� CFO/MI report Monitoring performance against objectives 4� Financial reporting External reporting 5� Reports from Chairs of Committees Audit, Nomination, Remuneration and Risk Committee activity 6� Board changes and performance Appointments, succession and performance 7� Other matters 5%
Likely consequences of decisions in the long term The Board is continually focused on long-term preservation of value and the decisions to invest in Bulk Purchase Annuity purchases over the last two years and continuing as a core part of the Group’s strategy have resulted in immediate capital retention for benefits emerging over the longer term� The Board’s decision to acquire the Standard Life Assurance businesses in 2018 provided a substantial open business franchise to offset the Heritage business run-off� And the Board’s consideration of its strategy (July 2019) followed by approval of the Annual Operating Plan (November 2019) focused strongly on preserving value and sustaining the dividend over the next ten years�
An investor perception survey on Phoenix undertaken by HSBC (Phoenix corporate broker) was discussed by the Board in July 2019�
Regulators The Board is updated at every Board meeting on regulatory matters as a key part of the Group CEO’s Report enhanced by further reporting between Board meetings and as part of various other Board papers as the regulatory relationship is central to all Phoenix does as a major financial services operation� More detailed reporting on regulatory matters and the interaction with Phoenix’s regulators occurs at the Board Risk Committee and at the Board and Risk Committee meetings of the Phoenix Life subsidiaries� Senior executives of the PRA and FCA attended the Board meeting on 2 July 2019 for an interactive session with the Board during which the regulators presented the key themes of their recent Periodic Summary Meeting Report (‘PSM’) and Firm Evaluation Report (‘FEM’)on Phoenix�
As part of our programme of enhancing the Board’s engagement with colleagues, the Board held a series of interaction sessions with colleagues at our Edinburgh office. This was held over two days in October 2019 to coincide with the Board meeting programme.
The sessions included an informal lunch when the Board engaged with various colleagues over topics raised, and separate sessions for colleagues from various parts of the business with each of the Chairs of the Audit, Risk and Remuneration Committees� The Board believes these are good ways to hold two-way informal conversations with colleagues and intends to do more in 2020�
In addition to the matters referenced above, a further activity for the Nomination Committee was to review the time spent by Directors in fulfilling their duties� This concluded that the time given by Directors in 2019 exceeded the level expected in their appointment terms, particularly given the time devoted by the Board to lead to the approval of the acquisition of ReAssure in December 2019� This followed significant demands on the Board’s time in early 2018 to approve the acquisition of Standard Life Assurance�
General The other areas that the Audit Committee covered throughout 2019 included the following: • Whistleblowing arrangements within the Group as well as any whistleblowing activity where an employee raised concerns, in confidence, about any possible improprieties� An update to the whistleblowing policy was approved which took into account the wider geographical presence of the Group which complied with the FCA and PRA’s whistleblowing rules�
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2019 In addition to the significant matters discussed in 2019, the Committee also: • Reviewed adherence to the Group Risk Management Framework and considered the appropriateness of the Group’s overall Risk Appetite Statements�
• Considered risks, issues and matters that are escalated from the Phoenix Life Risk Committee�
will be eligible for a 2020 AIP award for the portion of the year in which he remains employed by the Group, which will be payable in March 2021 and subject to 50% deferral in line with the proposed policy� Clive’s in-flight LTIP awards will be pro-rated to his end date�
Clive will leave Phoenix on 9 March 2020� He will receive pay in lieu of notice for the period starting on this date and ending on 7 November 2020, comprising salary, pension allowance and insurance benefits� He will receive no compensation for loss of car allowance� Clive’s 2019 AIP will be paid in the normal way and subject to 40% deferral in line with the current policy� Clive
The metrics and weighting for the 2020 AIP are shown below, with the 2019 metrics included for clarity�
INTRODUCTION This report contains the material required to be set out as the Directors’ Remuneration Report (‘Remuneration Report’) for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (‘the DRR regulations’)�
SECTION A THIS SECTION CONTAINS THE DIRECTORS’ REMUNERATION POLICY AS PROPOSED FOR APPROVAL BY THE COMPANY’S SHAREHOLDERS AT THE COMPANY’S 2020 AGM ON 15 MAY 2020.
GENERAL POLICY The Remuneration Policy for Executive Directors is summarised in the table below along with the policy on the Chairman’s and the Non-Executive Directors’ fees�
Clarity & Simplicity • The reward framework seeks to embed simplicity and transparency in the design and delivery of remuneration� We have proposed changes to our AIP performance measures (to replace the Personal Performance assessment with a Strategic Scorecard with transparent, measurable metrics, and to replace Management Actions with Net Flows (Workplace)) in order to simplify the AIP assessment process while enhancing alignment to Group strategy�
Minimum Consists of base salary, benefits and pension: • Base salary is the salary to be paid in 2020� • Benefits measured as benefits to be paid in 2020� • Pension measured as the full entitlement of approximately 10�5% of base salary receivable (after the reduction to payments made in cash for employers’ National Insurance Contributions)�
DBSS Deferred awards vest at the end of the original vesting period
Consistent with previous practice, the Remuneration Committee did not consult with employees in preparing the 2020 Remuneration Policy although has established further employee engagement in 2019 in accordance with the requirement under the Corporate Governance Code� Further details are shown on page 84�
4 The Origo Options service is a recognised industry-wide initiative for processing Pension Transfers to ensure payments are made in a timely fashion� The service has set a benchmark standard of a 12 calendar day average elapsed time for processing transfers�
Oversaw the renogotiation of the Group’s Revolving Credit facility at lower cost and improved terms� During the year Fitch reaffirmed their rating for the business and amended the rating to ‘positive outlook’ following the announcement of the proposed ReAssure Group plcacquisition�
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2019 were £590,721� (2018: £525,707)�
Annual bonus 150% of base salary at maximum� Details of the 2020 AIP are set out below� LTIP 275% of base salary� Details of the 2020 LTIP awards are set out below� Buyout awards The Company will buy out the in-flight awards granted by his former employer in March 2017 and
Total remuneration (single figure) 2019 Option A 2,975,837 31,605 47,899 74,469 Ratio 94:1 62:1 40:1
Senior management remuneration Review remuneration proposals on recruitment and on termination of senior employees ✔ ✔ ✔
In accordance with the UK Corporate Governance Code, Directors must stand for election/re-election annually� The Board of Directors will be unanimously recommending that all of the Directors (apart from James McConville, who is not standing for re-election) should be put forward for election/re-election at the forthcoming AGM to be held on 15 May 2020�
The disclosures required in respect of the Company’s diversity policy are addressed in the Strategy and KPIs section of the Strategic Report on page 30� The UK Corporate Governance Code (the ‘Code’) applies to the Company and full details on the Company’s compliance with the Code are included in the Corporate Governance Report� The Code is available on the website of the Financial Reporting Council – www�frc�org�uk�
Economic assumptions are set by management taking into account market conditions as at the valuation date� Noneconomic assumptions such as future expenses, longevity and mortality are set based on the Group’s past experience, market experience, market practice, regulations and expectations about future trends�
To obtain sufficient audit evidence to conclude on the valuation of modelled debt securities, we: • reviewed the SOC1 report of the OSP covering period to 30 September 2019 and determined the impact of any identified control exceptions; • obtained the bridging letter for the period 1 October 2019 to 31 December 2019 to confirm that the controls over the valuation of modelled debt securities were operating during the period� In addition, we tested a sample of these controls in the bridging period to confirm they were operating effectively; and
This subjects value of these assets to a higher risk of material misstatement�
Of the four components selected, we performed an audit of the complete financial information of three components (‘full scope components’) which were selected based on their size or risk characteristics� For the remaining Other Companies (‘specific scope components’), we performed audit procedures on specific accounts of Phoenix Life and SLAL service companies (provisions, accruals and deferred income, external revenue, wages and salaries and administrative expenses) and of SLINTL (cash and cash equivalents and insurance contract liabilities)�
The primary audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the relevant risks of material misstatement detailed above, and set out the information required to be reported to the primary audit team�
Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion�
Independent Auditor’s Report continued 144 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
• certain disclosures of Directors’ remuneration specified by law are not made; or
2 Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions�
Finance costs C5 (162) (142) Profit for the year before tax 351 259
The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 197 in note F4.
A5. New Accounting Pronouncements not yet Effective The IASB has issued the following new or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.
1 At 1 January 2019 leased assets of £80 million included within investment properties were classified as right-of-use assets.
Effect of discounting using the incremental borrowing rate as at 1 January 2019 (11)
The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £6,005 million (2018: £6,479 million) located in the UK and £375 million (2018: £367 million) located in the rest of the world.
The net adverse investment return variances and economic assumption changes on long-term business of £177 million (2018: £283 million positive) primarily arise as a result of losses on hedging positions held by the life funds reflecting improving equity markets in the year. The Group’s exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. These adverse impacts have been partly offset by the positive impacts of strategic asset allocation activities, including investment in higher yielding illiquid assets, and lower fixed interest yields experienced during the period.
B3.2 Diluted earnings per share The result attributable to ordinary equity holders of the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 722 million (2018: 551 million). The Group’s long-term incentive plan, deferred bonus share scheme and sharesave sharebased schemes increased the weighted average number of shares on a diluted basis by 1,474,170 shares for the year ended 31 December 2019 (2018: 375,020 shares).
Interest income on loans and deposits at amortised cost 6 10
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2019 or 2018.
Audit of the consolidated financial statements includes amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor in both 2019 and 2018. The 2018 balance also includes amounts in respect of the audit of the acquisition balance sheet of the acquired Standard Life Assurance businesses.
Cash flows: Net decrease in cash equivalents 4 3 170 PHOENIX GROUP HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2019
Reinsurers share of investment contracts liabilities without DPF are valued, and associated gains and losses presented, on a basis consistent with investment contracts liabilities without DPF as detailed under the ‘Financial liabilities’ section below.
Financial liabilities are designated upon initial recognition at FVTPL and where doing so results in more meaningful information because either: • it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
Financial liabilities at fair value through profit or loss: Held for trading – derivatives 734 387 734
Included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £134 million (2018: £162 million) and £70 million (2018: £96 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative period.
3 Non-rated debt securities includes equity release mortgages with a value of £2,020 million. Further details are set out in note E2.3.
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 (but excludes the impact on the Group’s pension schemes).
Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2019, since unhedged exposure to foreign currency was relatively low (2018: not considered significant).
Reinsurance accepted The Group accepts insurance risk under reinsurance contracts. Amounts paid to cedants at the inception of reinsurance contracts in respect of future profits on certain blocks of business are recognised as a reinsurance asset. Changes in the value of the reinsurance assets created from the acceptance of reinsurance are recognised as an expense in the consolidated income statement, consistent with the expected emergence of the economic benefits from the underlying blocks of business.
F3.1 Premiums ceded to reinsurers Premiums ceded to reinsurers during the period were £556 million (2018: £481 million).
Pricing inappropriate pricing of new business that is not in line with the underlying risk factors for that business.
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2019, undertaken by independent qualified actuaries.
The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20 year period, and had a remaining useful life as at 31 December 2019 of 9.9 years.
Other provisions Other provisions comprises a number of items including litigation and onerous contract provisions, obligations arising under a gift voucher scheme operated by the SunLife business and a commission clawback provision which represents the expected future clawback of commission income earned by the SunLife business as a result of assumed lapses of policies or associated benefits.
The Group had commitments under non-cancellable operating leases as set out below.
Later than five years 40 1 The disclosures have been restated to reflect the adjustments made to the 2018 operating lease commitments as discussed in note A6.
When assessing control over collective investment schemes, the Group considers those factors described under the ‘Basis of consolidation’ in note A1. In particular, the Group considers the scope of its decision-making authority, including the existence of substantive rights (such as power of veto, liquidation rights and the right to remove the fund manager) that give it the ability to direct the relevant activities of the investee. The assessment of whether rights are substantive rights, and the circumstances under which the Group has the practical ability to exercise them, requires the exercise of judgement. This assessment includes a qualitative consideration of the rights held by the Group that are attached to its holdings in the collective investment schemes, rights that arise from contractual arrangements between the Group and the entity or fund manager and the rights held by third parties. In addition, consideration is made of whether the Group has de facto power, for example, where third party investments in the collective investment schemes are widely dispersed.
H4. Structured Entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes: (a) restricted activities; (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors; (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).
AB SICAV I – Diversified Yield Plus Portfolio Luxembourg30 SICAV, sub fund 42.92%
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 of the 2017, 2018 and 2019 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a ‘market condition’. The fair value of the 2017, 2018 and 2019 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below: 2019 TSR performance condition 2018 TSR performance condition 2017 TSR performance condition
Fair value losses/(gains) on: Financial assets and derivative liabilities (18,784) 12,718
Group capital Group capital is managed on a Solvency II basis. Under the Solvency II framework, the primary sources of capital managed by the Group comprise the Group’s Own Funds as measured under the Solvency II principles adjusted to exclude surplus funds attributable to the Group’s unsupported with-profit funds and unsupported pension schemes.
I. OTHER NOTES continued I4. Related Party Transactions In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 ‘Related party disclosures’.
On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes with an initial fixed interest rate of 5.625%. Fees associated with these notes will be deferred and amortised over the life of the loan.
Impairment of financial assets The Company assesses the expected credit losses associated with its loans and deposits, other amounts due from Group entities and cash carried at amortised cost. The measurement of credit impairment is based on an Expected Credit Loss (‘ECL’) model and depends upon whether there has been a significant increase in credit risk.
See note 15 for detail of how the Company assesses whether the credit risk of a financial asset has increased since initial recognition and the approach to estimating ECLs.
At 31 December 1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).
Where indicators of impairment have been identified the carrying value of the Company’s investments in its subsidiaries has been tested for impairment at the period end. In 2019, impairments of £4,146m (2018: £nil) were recognised to align the carrying value of certain investments to their recoverable amount. The impairment charge arose as a consequence of the receipt of a £5,640 million dividend from Old PGH during the year.
Loans and deposits – The Company is exposed to credit risk relating to loans and deposits from other Group companies, which are considered low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing whether there have been any historic defaults, by reviewing the going concern assessment of the borrower and the ability of the Group to prevent a default by providing a capital or cash injection. Specific considerations for the loan to the EBT loan are discussed in note 10.
Financial assets held by the non-controlling interest in consolidated collective investment schemes 3,661
4 Includes equity release mortgages of £2,781 million, commercial real estate loans of £388 million, income strips of £690 million, policy loans of £10 million, other loans of £284 million, net derivative assets of £3,976 million, reinsurers’ share of investment contracts of £8,881 million and other investments of £519 million.
MINIMUM CAPITAL REQUIREMENTS Minimum Capital Requirement (‘MCR’) is the minimum amount of capital an insurer is required to hold below which policyholders and beneficiaries would become exposed to an unacceptable level of risk if an insurer was allowed to continue its operations. For Groups this is referred to as the Minimum Consolidated Group SCR (‘MGSCR’).
It helps give stakeholders a better understanding of the underlying performance of the Group by identifying and analysing non-operating items�
Assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets� This includes assets recognised in the Group’s IFRS consolidated statement of financial position together with certain assets administered by the Group but for which beneficial ownership resides with customers�