Annual Report • Apr 15, 2010
Annual Report
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Annual Report & Accounts 2009
Phoenix Group Holdings (formerly known as Pearl Group and Liberty Acquisition Holdings (International) Company)
Phoenix Group is the UK's largest closed life and pension fund consolidator. The Group has in excess of £66 billion of assets under management and over 6.5 million policyholders.
As a closed life business consolidator Phoenix Group focuses on the effi cient run-off of existing policies, maximising economies of scale and generating capital effi ciencies through operational improvements. The Group only writes annuity business for existing policyholders and therefore has limited new business capital strain.
The Group has implemented a business model which combines the use of in-house fi nancial control and risk management, outsourced customer administration and in-house asset management – all of which combine to protect policyholders and maximise shareholder return.
To improve returns for policyholders and deliver value for shareholders.
To be recognised as "the industry solution" for the safe, innovative and profi table decommissioning of closed life funds in the UK.
Liberty Acquisition Holdings (International) Company ("Liberty") was incorporated on 2 January 2008 under the laws of the Cayman Islands as an exempted company with limited liability. Liberty was formed as a non-operating Special Purpose Acquisition Company ("SPAC") to acquire one or more operating businesses with principal activities outside of North America. Liberty listed on Euronext Amsterdam on 6 February 2008.
On 29 June 2009, Liberty announced that it would acquire a group of businesses that specialise in the consolidation and management of closed life and pension funds, referred to in the Annual Report & Accounts 2009
as the "Pearl businesses". The acquisition completed on 2 September 2009* when Liberty became the ultimate parent of the Pearl businesses.
Following the acquisition, Liberty changed its legal name to Pearl Group and moved its principal place of business to Jersey. Subsequently, on 15 March 2010, Pearl Group changed its name to Phoenix Group Holdings.
Throughout the Annual Report and Accounts 2009, Phoenix Group Holdings and its subsidiaries are referred to as "Phoenix Group" or "the Group". When referring to Phoenix Group Holdings, the parent company, "Phoenix Group Holdings" or "the Company" is used.
| Jan 08 Liberty incorporated |
Feb 08 Liberty obtains Euronext listing |
Aug 09 FSA confi rms non-objection to change of control of the Pearl businesses |
Sept 09 Liberty completes acquisition of the Pearl businesses |
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|---|---|---|---|---|---|---|
| Liberty | Phoenix Group Holdings |
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| h | ||||||
| Pearl businesses | h | |||||
| h | ||||||
| 31 Dec 07 | 30 June 08 | 31 Dec 08 | 30 June 09 | 31 Dec 09 | ||
| May 08 Acquisition of Resolution plc |
Nov 09 Secondary UK listing |
Our structure is aligned to the market sectors in which we operate.
The Corporate Offi ce brings together centralised functions that provide Group-wide services to support the delivery of the Group goals, strategies and business plans
Phoenix Life manages the closed life business of the Group
Ignis provides asset management services to the Group's life companies as well as thirdparty clients
| Annual report | |
|---|---|
| --------------- | -- |
The Annual Report & Accounts 2009 include the consolidate d results ofPhoenixGroup Holdings and its subsidiaries from 1 January to 31December2009 presented in accordance with International Financial Reporting Standards ("IFRS"). The results of the Pearl businesses are therefore includedfrom 28 August 2009* to31December 2009.
To assist users and give shareholders a basis for future comparison, the Directors have provided additional fi nancial information on a proforma basis. This information includes the Pearl businesses for the period from 1 January 2009 to 27 August 2009 in addition to the consolidated results of Phoenix Group Holdings from 1 January 2009 to 31 December 2009. Proforma information is separately referenced throughout the AnnualReport & Accounts 2009 and is predominantly located within the sections covering Performance and theMarketConsistentEmbeddedValue("MCEV") supplementary information.
Certain commentary provided throughout the Annual Report & Accounts 2009 refers to the activities of the Pearl businesses prior to their acquisition. The Directors believe it is necessary to include thisinformation in the context of the programmes of strategic and operational change that the Group is currently undertaking.
Additionally, although it is not necessary for the Company to comply with the UK Companies Act 2006 ("CA06"), or, by virtue of its secondary listing on the LSE, with the UK Combined Code on Corporate Governance ("the Combined Code") the Directors support the high standards of corporate governance and reporting they require. Accordingly the Annual Report &Accounts 2009 seek s to comply with certain of these provisions.
* The acquisition date for accounting purposesisdeemed to be the date on which Phoenix Group Holdings effectively obtained control of the Pearl businesses. The point at which control passed and the acquisition became unconditional for accounting purposes is deemed to be the date on which the FSA confi rmed their non-objection to the change of control of the Pearl businesses 28 August 2009. The legal date ofcompletion for the acquisition was fi ve days later on 2 September 2009.
Overview
| Pro forma UK holding | |
|---|---|
| company cash inflows | |
IGD capital surplus
£1.2billion
IFRS operating profit
(pro forma)
operating profit
£34 million
£457 million
£282 million
Pro forma asset management
Group MCEV
£716 million
Dividend per share
€0.17
Assets under management
For more information see page 18 to 21
8p For more information see page 14 and 15
Overview
Chairman's report 02 Group Chief Executive's report 04
Pro forma reconciliation of Group operating profit to profit before the tax attributable to owners 79 Statement of consolidated financial position 80 Statement of consolidated cash flows 82 Statement of consolidated changes in equity 83 Notes to the consolidated financial statements 84
| Summarised consolidated income statement |
162 |
|---|---|
| Pro forma MCEV earnings per ordinary share |
162 |
| Statement of consolidated comprehensive income |
163 |
| Reconciliation of movement in pro forma Group MCEV equity |
163 |
| Analysis of movement in pro forma Group MCEV equity |
164 |
| Pro forma Group MCEV analysis of earnings |
166 |
| Reconciliation of Group IFRS equity to MCEV net worth |
167 |
| Notes to the pro forma MCEV financial statements |
168 |
| Additional information | ||
|---|---|---|
| Shareholder information Glossary |
180 182 |
"The interests of our policyholders are closely aligned with those of our shareholders: both are well served by a Group that is financially robust, prudently managed and widely respected."
This has been a momentous year for Phoenix Group Holdings, with the acquisition of the Pearl businesses in September 2009. Against the backdrop of a global recession, these businesses required additional capital and, through a restructuring of debt obligations and an injection of new funds, their balance sheet has been strengthened by some £1 billion. The acquisition has also provided the Pearl businesses with access to public markets through the Company's listing on Euronext and secondary listing on the London Stock Exchange (LSE).
The purchase and subsequent restructuring marks the start of an exciting phase for the newly formed Group and this is reflected in the Board's decision to develop the Phoenix name as the core brand for the Group. Since the majority of the Group's activities are within the Phoenix Life umbrella, there are synergies and value to be obtained by extending the Phoenix name and brand to the holding company.
The UK life insurance industry, our core marketplace, continues to adapt to changes in the market and regulatory environment. The disappointing returns and lack of transparency of traditional with profit products have led to a significant reduction in their attractiveness for providers and consumers alike. Taken together with a more onerous regulatory framework, it is clear that there will be an increasing number of life companies ceasing to write new capital intensive policies and disposing of books of business. The Group is well positioned to meet the growing need for providers capable of managing legacy policies safely and responsibly on behalf of millions of policyholders.
The business model of the Group is a very simple one. We operate closed life funds (funds that no longer write new life policies) in the UK, with an efficient, outsourced operating platform and a leading asset management capability. We combine sophisticated asset/liability matching techniques with a prudent approach to risk to ensure that the Group is capital efficient, and the predictable cash generative characteristics of closed life funds allow us to operate with higher leverage than life companies that are still writing new business. Our scale, with more than £66 billion of assets under management and over 6.5 million policyholders, positions us as the natural consolidator of closed life funds in the UK. This is reinforced by our proven expertise in extracting synergy value through the integration of acquisitions.
Overview
Financial and operational stability remain our near-term focus following the acquisition and restructuring in September.
The Group's strategy is similarly straightforward. Financial and operational stability remain our near-term focus following the acquisition and restructuring in September. We are undertaking additional portfolio de-risking and further integration of our back offices and asset management activities to deliver greater efficiencies. We are also simplifying our capital structure and migrating our share register to best match the longer term ambitions of the Group. This process will be facilitated by moving our listing from Euronext to a Premium Listing on the LSE which we are on track to achieve in the first half of 2010. We will progressively turn our attention to creating further efficiencies from within our existing portfolio of life funds and the realisation of our consolidation ambitions for the UK closed life sector as a whole. This process is financially attractive for the Group and has considerable social merit, providing the potential to deliver improvements in the security, service and returns for policyholders.
Indeed, policyholder concerns remain at the heart of everything we do. With our proud heritage of life assurance brands such as Phoenix, Pearl, Scottish Mutual, London Life and NPI, we are acutely aware of the millions of our policyholders who rely on us for their long-term financial security. We are determined that our policyholders receive continually improving levels of service and investment performance, combined with demonstrable fair treatment.
The interests of our policyholders are closely aligned with those of our shareholders: both are well served by a Group that is financially robust, prudently managed and widely respected. Nonetheless, they are not always identical and therefore it is crucial that we have strong and effective governance arrangements.
The Board of Phoenix Group Holdings has been strengthened considerably since September and we are fortunate to have been joined recently by four new Non-Executive Directors: Alastair Lyons, Charles Clarke, Isabel Hudson and David Woods, who each bring significant relevant experience. Their contribution is already in evidence as we advance our strategic thinking and build a strong platform for the future. I look forward to working with them and the rest of the Board in achieving the Group's goals.
Looking ahead, we expect that economic conditions will remain very challenging for some time. The internal challenges faced by the Group are also not to be underestimated and much remains to be done: continuing to deliver synergies from combining the Group's operations; overcoming a number of structural complexities en route to achieving the Premium Listing; integrating and realising value from the asset management businesses; simplifying our financial, legal and shareholding structures; creating sound long-term funding arrangements; and developing further the reputation and standing of the Group. These add up to a demanding agenda but I am confident that we are progressively putting in place the right policies and resources to realise the full potential of the Phoenix Group – for policyholders, shareholders, employees and, more widely, for the UK financial services sector and millions of consumers.
Ron Sandler Chairman 30 March 2010
We are progressively putting in place the right policies and resources to realise the full potential of the Phoenix Group.
"Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009."
IGD capital surplus of £1.2 billion at 31 December 2009, an increase of £0.5 billion.
Pro forma holding company cash inflows of £716 million generated during the year.
Group MCEV of £1,827 million at 31 December 2009.
I am pleased to present the first annual results of Phoenix Group Holdings since the acquisition of the Pearl businesses in September 2009. I believe this acquisition marks the beginning of an exciting phase in the Company's history and positions us strongly for the future.
As CEO of the Pearl businesses I was delighted to take on the additional responsibility of becoming the Group Chief Executive for Phoenix Group Holdings. Working closely with our Chairman, Ron Sandler, who joined the Group in September, I am committed to continuing the significant progress already made in developing the Group for the benefit of our policyholders, shareholders and employees.
The end of 2008 and early 2009 was a challenging period for all business sectors. But life insurers, including the Pearl businesses, were particularly impacted by widening corporate bond spreads and falling asset markets. As a result, although the underlying life companies had sufficient capital, the extreme market dislocation challenged the sustainability of the Pearl businesses' highly leveraged financial structure. This led to their acquisition by Phoenix Group Holdings, an injection of new capital and a significant restructuring of bank loans and other liabilities.
Overall, the restructuring strengthened the Group's balance sheet by some £1 billion and as a result we enter 2010 in a much improved financial position. This can be evidenced by the Insurance Groups Directive ("IGD") regulatory solvency calculation, where surplus capital amounted to £1.2 billion (or 132 percent of regulatory requirements) at the end of 2009 before allowing for the payment of the 2009 dividend, compared to a surplus of £0.7 billion at 1 January 2009.
Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009. Our primary performance measure is pro forma UK holding company cash inflows which continues to exhibit strength with £716 million remitted during the year. This is well in excess of the Group's debt servicing obligations and ahead of our target for the year.
We achieved this strong cash flow by identifying and implementing a number of management actions during 2009, including the transfer of the Scottish Provident and Scottish Mutual life funds into Phoenix Life Limited, the restructuring of Phoenix & London Assurance, the renegotiation of certain outsourcer contracts and the resolution of other legacy issues. We are targeting £2.7 billion of cash generation over the next five years.
Our primary measure of long-term shareholder value is MCEV. We achieved a Group MCEV pro forma operating profit of £374 million for the year ended 31 December 2009 and Group MCEV of £1,827 million at 31 December 2009 (compared to a pro forma £1,044 million on a comparable basis at 31 December 2008). The change during the year reflects the positive impact of improved investment markets in the second half of 2009 and implemented management actions.
Phoenix Group has two core segments: Phoenix Life and Ignis Asset Management. Analysis of their results provides further evidence of a strong performance during the year.
Our life companies produced a creditable result for 2009 with improving returns across the underlying businesses. We achieved a full year pro forma IFRS operating profit of £469 million (£285 million which arose in the post acquisition period from 28 August 2009).
Overview
Assets under management of £66.9 billion at 31 December 2009.
The transition of the private Pearl businesses into a listed environment has brought about a short-term change in our priorities.
8p
Additional information on the Group's objectives and strategies is given on pages 14 and 15
Our asset management business continued to perform well despite the market volatility. We achieved a pro forma IFRS operating profit of £34 million with assets under management also remaining broadly stable at £66.9 billion in spite of insurance policy maturities.
These are pleasing results for 2009 which provide a stable financial footing for the future.
The transition of the private Pearl businesses into a listed environment has brought about a short-term change in our priorities and one key objective is to obtain a Premium Listing during the first half of 2010 (a matter covered in more detail later). However, the strategies and operating models for Phoenix Life and Ignis Asset Management remain broadly unchanged as the Board continues to support the focus on closed life insurance funds.
Deliver predictable long-term cash flow, drive increased value within Phoenix Life and increase the profits of Ignis Asset Management
Demonstrate an understanding of our customers' needs and a commitment to deliver consistent service that provides ease of access to information and communicate in a way our customers understand
Ensure the security of policyholders is protected whilst actively seeking opportunities for enhanced value
Ensure the Group is well placed to meet all its long-term obligations by delivering a structure that has optimal levels of leverage and efficient capital structuring while driving operational excellence within our underlying businesses
Ensure high levels of employee engagement driven by strong leadership, clear communication, fair reward and development practices
Ensure the Group is recognised as the industry leader in closed life fund consolidation and the safe delivery of customer outcomes
Maintain scale through selective acquisitions – execution and integration are a core competency of the Group
Group Chief Executive's report (continued)
Completed funds mergers and progressed the closure of Glasgow and Peterborough life company offices.
It is of great credit to our employees that, despite the impact the acquisition and restructuring has had on the underlying businesses and employees during 2009, we continued to successfully deliver initiatives in line with our strategic goals. I therefore thank all employees for their hard work and energy during this period and recognise some significant achievements during the year:
We were also pleased to announce the appointment of Mike Merrick and Chris Samuel as Chief Executives for our Phoenix Life and Ignis Asset Management businesses respectively. In their new positions, Mike and Chris will assist me in delivering the strategic objectives of these businesses and the Group as a whole. Specifically Mike will continue to integrate the Group's closed life businesses and Chris will continue to build Ignis Asset Management's third party offering.
Risk and capital management are an essential part of the Group's strategic agenda. The effective management of our risks and the efficient allocation of capital against them is crucial in allowing us to achieve our strategic and operating objectives regardless of prevailing market conditions.
We believe Phoenix Life and Ignis Asset Management manage our key risks effectively but recognise that we have further work ahead to both enhance and fully embed the Group-wide risk governance, monitoring and reporting framework. In support of this risk agenda we recruited as Group Chief Risk Officer, Jean Park, in November 2009 and have established a Board level Risk Committee that will assist the Group in driving this agenda forward. All our future governance, risk and capital management initiatives will be aligned to the Solvency II directive.
We fully endorse the principles underlying the Solvency II framework and expect its implementation to result in an improved understanding of the links between governance, risk and capital management. However, while I welcome the benefits that Solvency II brings to the insurance industry, a number of important issues concerning the development and implementation of the Solvency II proposals remain – and these will need to be resolved without inadvertently impacting policyholders or the industry as a whole.
* All references to 2009 achievements are for the full year; encompassing the achievements of the Pearl businesses from 1 January 2009.
We have developed our own programme of activities to ensure compliance and identify opportunities within the Solvency II framework. For details
Overview
of the Group's internal programme for Solvency II please refer to our capital management report on page 36.
The Board has declared a dividend for 2009 of €0.17 per share which is expected to be paid on 15 April 2010. The 2009 dividend is in line with previous guidance of €0.50 per share per annum (pro rata from the date of the acquisition of the Pearl businesses to the year end).
In arriving at this dividend the Board has taken into account the conditions contained in the Group's credit agreements which include provisions restricting the distribution of profits by the Group. The dividend declaration reflects the maximum permitted pro-rated dividend payment in respect of 2009. Over time, we anticipate the Group's dividend policy to be more closely aligned with the underlying cash generation of our operating businesses.
Achieving a Premium Listing on the LSE is an important objective for the Group. Over time we believe that it will help to develop a broader investor base and improve liquidity.
In order to achieve a Premium Listing we are required to satisfy certain UK Listing Authority (UKLA) requirements. In particular we need to simplify our capital structure by reducing the number of outstanding warrants and contingent rights over the Group's shares to a maximum of 20 percent of the issued share capital. I was therefore pleased with the successful outcome of our public warrant and insider warrant exchange invitations.
Discussions with the holders of the contingent rights over shares have continued with a view to arriving at a solution which brings the proportion of dilutive instruments below the level required by the UKLA.
I believe the Group's business model is attractively differentiated from the rest of the UK life assurance sector. Our focus is on the consolidation of closed funds and our existing scale and previous experience makes us the natural home for these businesses. I expect the Group to play an increasingly important role in continuing to ensure the effective and efficient management of closed life insurance funds while overseeing the safe decommissioning of the with profit sector.
Our analysis shows that many life insurance companies employ significant amounts of regulatory capital to support in-force policies which are no longer actively marketed or sold. Furthermore, continued market volatility and management of key business risks will bring the issue of capital allocation into sharper focus as the insurance industry heads towards Solvency II. We believe this will encourage companies to identify ways of releasing and reallocating capital currently tied up in closed or quasi-closed funds. Additionally, the operational management costs involved in administering run-off portfolios will become increasingly uneconomic, particularly for those insurers with inefficient legacy infrastructure. These factors play to our strengths and reinforce the importance of the Group's role within the industry as it enters a period of significant change.
Maintaining strict financial discipline, a prudent approach to risk management and a focus on service will protect and, over time, enhance the value of the Group and its reputation.
Jonathan Moss Group Chief Executive 30 March 2010
Successful outcome of our public warrant and insider warrant exchange invitations.
2009 Dividend of €0.17 per share.
Although the markets in which we operate are complex our operating model is straightforward
Our business Although the markets in which we operate are complex, our operating model is straightforward. We acquire and efficiently manage closed life insurance businesses that are in run-off.
We operate in two interdependent market sectors: UK life insurance and asset management. These sectors continue to face significant challenges driven by a combination of market volatility, regulatory change and shifts in customer product choice.
In order to efficiently manage the life businesses while the policies are in run-off, it is essential that we achieve a high level of variability in the cost base. This ensures that the Group is not exposed to high fixed costs in relation to the volume of policies under management. To fulfil this aim we have established a model within Phoenix Life of separating financial and risk management from policy administration. Financial and risk management are core skills and is retained in-house. Our management service operation is charged with all sourcing strategies including putting in place arrangements for third party policy administration and having oversight of their performance. We use Ignis Asset Management, our in-house asset manager to manage the policyholders' investment portfolios.
To implement our model we have invested heavily in our employees, infrastructure and outsourcer partnerships, providing us with a scalable platform for acquisitions, their integration and hence the opportunity to benefit from synergies. This is key for the sustainability of our business, while providing policyholder protection and shareholder returns.
As a closed life business we do not need to allocate significant capital to support the writing and distribution of new insurance products. This means that the capital requirements of our operating businesses will decline as policies mature, thereby releasing excess capital as free cash flow. This emerging cash flow can be used to fund future acquisitions, reduce financial leverage and pay dividends to shareholders.
In operating this way the Group's management is able to focus its attention on financial control, risk management and customer outcomes.
As a closed life business we do not need to allocate significant capital to support the writing and distribution of new insurance products.
Day-to-day direction of the UK operations is the responsibility of the Board of Phoenix Life Holdings Limited ("PLHL") (a subsidiary of Phoenix Group Holdings) and its Executive Management Committee ("ExCo"). ExCo oversees matters relating to the implementation of the Group's strategy and recommends the optimal operating structure.
The members of ExCo and their key roles and responsibilities are outlined to the right.
Group Chief Executive and Director of PLHL
Chief Executive, Ignis Asset Management
Managing Director,
Group Human Resources Director
Group Finance Director and Director of PLHL
Chief Executive, Phoenix Life
General Counsel
Chief Risk Officer
Operating structure Our structure is aligned to the market sectors in which we operate. The Group has two core segments: life assurance (including management services) – Phoenix Life; and asset management – Ignis Asset Management. In addition, our Corporate Office provides functional support and coordination for the delivery of the Group's strategic initiatives.
Phoenix Life is responsible for the financial and operational management of the closed life funds with the support of the management service companies and outsource service providers. Phoenix Life is overseen by a management team, led by its Chief Executive, Mike Merrick.
The Group comprises eight regulated life companies including well-known brands such as Phoenix, Pearl, Scottish Mutual, London Life and NPI that have been acquired over a number of years. The Group is currently undertaking a programme of activity to integrate its life companies as far as possible in order to optimise economies of scale and capital allocation.
Although the life companies are closed and do not generally write new business, they do accept additional policyholder contributions on in-force policies and allow certain policies, such as pension savings plans, to be reinvested at maturity into annuities held by a Group life company. Writing annuities offers the Group a further opportunity to increase its embedded value through incremental investment returns, while also improving the management of the liquidity position of the individual life companies.
Certain of the Group's life insurance companies include a small amount of run-off general insurance business and Phoenix Group Holdings also owns Opal Re, a reinsurer based in Bermuda. Opal Re provides reinsurance solely to Phoenix Life to support the diversification of risk on the annuity books.
The management services operations ensure the life companies benefit from economies of scale, established outsourcer relationships and innovative integrated technology infrastructure.
Management services are charged with the efficient provision of financial and risk management services, sourcing strategies and delivery of all administrative services required by the Group's life companies. To facilitate this, management services operates a number of third party contracts including outsourced policyholder administration and IT services.
Management services has approximately 700 employees in three operational centres. However, plans are well underway to centre operations in the Group's Wythall office near Birmingham.
Ignis Asset Management is the Group's asset management business providing services to the Group's life companies as well as third party clients, including retail and institutional investors. Ignis Asset Management is overseen by a management Board led by its Chief Executive, Chris Samuel and offers investment, asset/liability and fund of funds management services and has recently combined its two in-house asset management businesses under the Ignis brand.
Whilst Ignis Asset Management primarily manages assets for the Group life companies, which provides the life companies with greater control over asset allocation and investment performance, it has also established and is further developing third party distribution channels. Ignis Asset Management has its own sales and marketing division with some 70 employees who focus on developing relationships with independent financial advisers and global investment consultants to help access new clients and increase Ignis Asset Management's third party asset base.
In addition, Ignis Asset Management has an innovative joint venture/ partnership model and currently has three active joint ventures and one partnership arrangement. This provides Ignis Asset Management's clients with a wide range of investment options and access to additional highly skilled, specialist fund management teams. Existing joint ventures include Argonaut, Cartesian and HEXAM, while Castle Hill is currently the only partnership arrangement. Ignis Asset Management provides marketing and distribution, access to research, compliance and administrative infrastructure functions on behalf of each of the joint ventures. This framework provides the joint ventures with access to the Ignis Asset Management platform and the related economies of scale, while allowing the investment managers to focus on maximising investment performance.
Ignis Asset Management has approximately 530 employees with offices in Glasgow and London.
The Corporate Office brings together centralised functions that provide Group-wide services. Under the direction of its Managing Director, Diarmuid Cummins, the Corporate Office has four principal roles:
Corporate Office has approximately 40 employees based in London.
Our mission is to improve returns for policyholders and deliver value for shareholders. We will do this by realising our vision to be recognised as "the industry solution" for the safe, innovative and profitable decommissioning of closed life funds in the UK.
Phoenix Group Holdings acquired the Pearl businesses in September 2009. Since then, the Group has undertaken a detailed review of its goals and strategies. The review concluded that the core business purpose, rationale and direction of the underlying Pearl businesses remain appropriate with the acquisition and restructuring providing the platform to execute these strategies.
In 2009*, the Group maintained its focus on delivering its goals despite market turbulence and the process of acquisition. In 2010 we expect that economic conditions will remain challenging and initially our focus will be on further developing the foundations of our business from which we can realise the full potential of the Group.
– Market analysis identified future acquisition opportunities
The Group has delivered a strong performance despite generally unstable economic conditions, resulting in a pro forma IFRS operating profit of £457 million
The Group's financial key performance indicators ("KPIs") are those that demonstrate the financial performance and strength of the Group as a whole.
These KPIs comprise:
Annual Report & Accounts 2009
| P | Pro forma UK holding company cash inflows | £716 million |
|---|---|---|
| IGD capital surplus | £1.2 billion | |
| Group MCEV | £1,827 million | |
| P | Pro forma IFRS operating profit | £457 million |
| IFRS operating profit | £282 million | |
| Dividend per share | €0.17 per share | |
| Assets under management | £66.9 billion | |
| P | Pro forma asset management operating profit | £34 million |
P Pro forma1
The Group financial KPIs are set out below. Comparatives are not provided since Phoenix Group Holdings was a SPAC during 2008.
Certain KPIs are calculated on a pro forma basis for 2009, as explained in the Annual report section on the inside cover. The pro forma KPIs are identified as such below.
The Board's intention is to build a long-term base of owners through the development of a progressive dividend policy. The Board seeks to achieve this through improving UK holding company cash inflows:
Analysis: Continued strong cash generation by the Group's operating subsidiaries has allowed the Group to exceed its full year target of more than £500 million in UK holding company cash inflows
As at 31 December 2009 the Group has achieved £275 million of its cash flow acceleration target of £500 million by the end of 2010
Definition and calculation: UK holding company cash inflows are a measure of cash and cash equivalents remitted by the Group's operating subsidiaries to the UK holding companies2 and are available to cover dividends, bank interest and other items
The 2009 KPI is pro forma and includes the cash flows of the Pearl businesses for the full year
Quantified target: Annual UK holding company cash inflows target of £400 to £500 million. In addition, an accelerated UK holding company cash inflows target of over £500 million by the end of 2010
Exceeded full year UK holding company cash inflows target of £500 million.
1 The Board has analysed the Group performance with reference to certain pro forma financial information. Where pro forma financial information is presented it is clearly indicated as being pro forma.
2 UK holding companies are PLHL, Pearl Group Holdings (No.2) Limited, Impala Holdings Limited, Pearl Life Holdings Limited, Pearl Group Holdings (No.1) Limited, PGH (LC1) Limited, PGH (LC2) Limited, PGH (LCA) Limited and PGH (LCB) Limited.
IGD surplus is a measure of the capital strength of the business:
Analysis: The estimated IGD surplus at 31 December 2009 has increased by over £500 million from the 1 January 2009 pro forma position of £673 million, primarily as a result of the cash injection from Phoenix Group Holdings and strong performance of the non profit funds, partially offset by financing costs. The estimated IGD surplus represents 132 percent coverage of regulatory requirements
Definition and calculation: The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest European Economic Area ("EEA") level insurance group holding company, which is PLHL. IGD surplus is defined as Group regulatory capital employed less the Group regulatory capital requirement
Quantified target: Group capital resources of 125 percent of the regulatory requirement
The Board considers that MCEV provides owners with the most relevant and consistent means of assessing the Group's ability to manage the closed book of business effectively:
Analysis: The Group continues to focus on improving the operating performance of its underlying businesses and the Group's embedded value remains in line with management's expectations
As at 31 December 2009 the Group has achieved £155 million of its £300 million increment to embedded value ("EV") target by the end of 2010
Definition and calculation: MCEV supplementary information – basis of preparation on pages 168 to 171 explains the definition and calculation
Quantified target: the Group's target is to increase EV (before payment of interest, debt principal and dividends) by up to £300 million through management actions by December 2010 and £100 million per annum thereafter to 2014. This includes targeted benefits in respect of management services actions that will not be included in the MCEV under the Group's methodology
The estimated IGD surplus has increased by over £500 million.
Group MCEV increased by £783 million.
Key performance indicators (continued) IFRS operating profit
IFRS operating profit of £282 million.
Dividend policy achieved for 2009.
Pro forma IFRS operating profit £282 million £457 million (pro forma) P
The Board considers that IFRS operating profit is a more representative measure of performance than 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 dividends:
Analysis: The IFRS operating profit of £282 million reflects a strong performance in continuing volatile economic conditions
Definition and calculation: The Group operating profit – IFRS section on pages 32 to 35 explains the definition and calculation of IFRS operating profit
Pro forma IFRS operating profit: To provide a basis for future comparison, a pro forma IFRS operating profit for the year ended 31 December 2009 of £457 million is disclosed
The pro forma IFRS operating profit is calculated as the operating profit of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings
Dividend per share in respect of the four-month period to 31 December 2009
€0.17 per share (€0.50 per share pro rata from the date of acquisition of the Pearl businesses)
This is a measure of owner return. In an environment of low interest rates, the Group recognises that dividends are important to owners1 :
Analysis: Phoenix Group Holdings legally acquired the Pearl businesses on 2 September 2009 and therefore a final pro-rated dividend is intended to be paid in 2010 in respect of the four month period to 31 December 2009 Quantified target: Whilst it remains restricted by its credit agreements, the Group initially intends to pay a dividend of €0.50 per share per annum
1 Phoenix Group is subject to Cayman Islands Companies Law. Under Cayman Companies Law distributions can be made out of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group's going concern assessment criteria. Therefore distributions may also be made by Phoenix Group Holdings out of share premium.
Assets under management ("AUM") Pro forma asset management IFRS operating profit £66.9 billion AUM £34 million asset management IFRS operating profit
For the Ignis Asset Management segment assets under management are a key driver of revenues and therefore impacts owner value:
Analysis: Total assets under management saw a small reduction from the pro forma position at 1 January 2009 of £1.3 billion (1.9 percent) to £66.9 billion as the net run-off of the closed life business was largely offset by positive changes in market values on in-house and third party assets under management
To provide a basis for future comparison, the pro forma asset management operating profit figure which includes 12 months of the Pearl businesses is £34 million
Definition and calculation: AUM represents all assets actively managed or administered by the asset management operations of the Group
The Group operating profit – IFRS section on pages 32 to 35 explains the definition and calculation of asset management IFRS operating profit
Pro forma Ignis Asset Management IFRS operating profit of £34 million.
Group performance
This Group performance commentary provides a review of the Group's development and performance for the year and of its financial position at the year end on both an IFRS and an MCEV basis.
The Board considers that the MCEV methodology represents a more meaningful basis of reporting the value of the Group's life companies and the drivers of performance than IFRS.
Cash generation is a key measure of the Group's performance and the Cash generation section sets out an analyis of the UK holding company cash flows for a full year.
Given the acquisition of the Pearl businesses part way during the year, the Board considers it helpful to present, on a pro forma basis, what would have been the 12-month result had the Pearl businesses been acquired from 1 January 2009. The pro forma results represent the results of the Group together with the results of the Pearl businesses prior to their acquisition by Phoenix Group Holdings.
As set out within the Annual report section of the inside cover, in July 2009 the owners of Phoenix Group Holdings voted in favour of the acquisition of the Pearl businesses. The total consideration for the acquisition was £493 million. The fair value of net assets acquired was £416 million, with the difference of £77 million representing goodwill. The goodwill is attributable to the Ignis Asset Management business and the management services operations within Phoenix Life.
The net assets acquired included acquired in-force business of £2.2 billion. This represents the present value of the estimated surpluses that should emerge on the purchased book of business over time. In addition, the net assets acquired include the value assigned to customer relationships and other intangibles of £476 million.
Information on the fair values of the assets and liabilities acquired is given in note 3 to the IFRS financial statements.
The Group's cash flows are generated from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management. The Group's closed life funds provide predictable fund maturity and liability profiles, creating expected long-term cash flows for distribution to policyholders and owners and repayment of outstanding debt. Although investment returns are less predictable, investment risks are mainly borne by policyholders in accordance with the terms of the relevant policies.
The statement of cash flows prepared in accordance with IFRS combines cash flows relating to policyholders and cash flows relating to owners, but the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital. For this reason, the following discussion of cash flows focuses on the UK holding company cash flows (i.e. the holding companies under Phoenix Group Holdings) for the year ended 31 December 2009, which reflect cash flows relating only to owners and which are, therefore, more representative of the cash that could potentially be distributed to the Group's owners.
This cash flow reflects the cash receipts from the operating subsidiaries to the Group's UK holding companies, as well as the uses of the cash receipts. The surplus owner cash will be used to fund inter alia the payment of Phoenix Group Holdings' dividend in April 2010.
Pro forma UK holding company cash inflows from the operating subsidiaries for the year were ahead of target at £716 million, compared to the 2009 target of £500 million.
The table below sets out the cash remittances to the UK holding companies and the uses of the cash remittances:
| £m Cash receipts |
31 December 2009* 466 |
|---|---|
| Cash receipts from life companies | |
| Cash equivalents released from life companies | 194 |
| Cash receipts from Ignis Asset Management | 21 |
| Cash receipts from service companies | 35 |
| Total receipts of cash and cash equivalents1 | 716 |
| Uses of cash Non-recurring cash outflows |
|
| Settlement with Royal London | 240 |
| IT and other business transformation costs | 67 |
| Debt interest2 | 72 |
| Transaction and restructuring costs | 30 |
| Pension scheme contributions | 25 |
| Other | 10 |
| Total non-recurring outflows | 444 |
| Recurring cash outflows | |
| Pension scheme contributions3 | 33 |
| Other operating expenses | 27 |
| Debt interest | 102 |
| Total recurring outflows | 162 |
| Total uses of cash | 606 |
* Includes 12 months of results of the Pearl businesses
Group performance – Cash generation (continued)
£466 million of cash and £194 million of cash equivalents were remitted by Phoenix Life from the emergence of surplus and regulatory capital releases. In addition a number of management actions have contributed to these remittances including the fund mergers and the resolution of specific legacy issues.
As a result of resolving certain legacy issues, receipts from Phoenix Life in the year also included remittance of a £170 million receivable due from Royal London to one of the life companies. This receivable was used to offset amounts due to Royal London by other Group companies. Following a payment to Royal London in December 2009, the Group's true-up liabilities1 to Royal London have now been settled.
The Group's UK holding companies incurred IT and other business transformation costs of £67 million in 2009, including costs associated with the Group's transformation programme with its outsourcers. Known IT and other business transformation costs of the UK holding companies are expected to reduce by between 25 and 50 percent in 2010, and by a further 50 percent in 2011, when the current operational projects are expected to be completed.
During 2007 the Pearl businesses and the Trustees of the Pearl Group Staff Pension Scheme entered into a contract under which the Pearl businesses guaranteed returns on the defined benefit Pearl Scheme assets sufficient to ensure that there would be no funding shortfall by 30 June 2027. As an integral part of Phoenix Group Holdings' acquisition of the Pearl businesses, agreement was reached with the Trustees of the Pearl Group Staff Pension Scheme to replace the existing funding guarantee with a schedule of cash contributions of £50 million in 2009 followed by cash payments of £25 million per annum (subject to satisfaction of capital resource requirements) for a period of ten years, commencing on 30 September 2010. The first cash payment from the holding companies to the Pearl Group Staff Pension Scheme of £50 million (included above as £25 million recurring and £25 million non-recurring) occurred in October 2009.
The UK holding companies paid interest to their lending banks and Royal London of £167 million in 2009. Annualising the £34 million post acquisition financing costs on this debt (as set out in the Group operating profit – IFRS section) provides a more representative indication of the Group's future debt financing commitments than the full year cash payments and forms the basis for the recurring, non recurring split as provided above.
1 In connection with their acquisition of Resolution plc in 2007, the Pearl businesses transferred certain assets of Resolution plc to Royal London for total consideration of £1.3 billion (subject to certain post-closing adjustments, or "true-ups").
Whilst the IFRS consolidated financial statements consolidate the results of the Pearl businesses for the period from acquisition on 28 August 2009 to 31 December 2009, the pro forma MCEV results include a full year's contribution for the acquired Pearl businesses. The pro forma MCEV results are therefore based on the results of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings.
The supplementary MCEV information reflects the financial position of the Group at 31 December 2009. The asset management and management service businesses are included in the Group MCEV at the value of IFRS net assets and do not include the future earnings from its existing business. This is because, in the opinion of the Directors, applying the CFO Forum MCEV principles and guidance published in October 2009 to these businesses would not provide a fair reflection of the Group's financial position as explained in the "Restatement of the pro forma 31 December 2008 Embedded Value" section on page 31.
The Group generated pro forma MCEV operating earnings of £374 million before tax for the year ended 31 December 2009.
The Board is pleased to report that embedded value performance was strong in a challenging trading environment and reflects the resilient performance of Phoenix Life and Ignis Asset Management throughout the year.
| Pro forma | Year ended |
|---|---|
| £ million | 31 December 2009* |
| MCEV operating earnings | |
| Life MCEV operating earnings | 380 |
| Management services operating profit | 14 |
| Ignis Asset Management operating profit | 34 |
| Corporate operating loss | (54) |
| Group MCEV operating earnings before tax | 374 |
| Tax on operating earnings | (105) |
| Group MCEV operating earnings after tax | 269 |
* Includes 12 months of results of the Pearl businesses
Group performance – MCEV (continued)
Other than vesting annuities, the Group's Life operations are closed to new business. The principal underlying components of the life MCEV operating earnings are therefore the expected existing business contribution together with non-economic experience variances and assumption changes.
| Pro forma £ million |
Year ended 31 December 2009* |
|---|---|
| Expected existing business contribution | 95 |
| New business value | 22 |
| Non-economic experience variances and assumption changes | |
| – Experience variances | 62 |
| – Other operating variances | 21 |
| – Assumption changes | 73 |
| Total non-economic experience variances and assumption changes | 156 |
| Life MCEV operating earnings after tax1 | 273 |
* Includes 12 months of results of the Pearl businesses after tax
1 Life MCEV operating earnings is derived on an after tax basis. For presentational purposes Life MCEV operating earnings before tax has been calculated by grossing up the after tax Life MCEV operating earnings using a tax rate of 28 percent. Life MCEV operating earnings before tax of £380 million is therefore calculated as £273 million (as above) grossed up for tax at 28 percent
Expected existing business contribution
The expected contribution on the existing business for the year ended 31 December 2009 of £95 million after tax represents the expected return on the opening MCEV using a one year gilt forward rate plus the Group's short-term expectations of excess investment returns on equities, properties and bonds. This rate is expected to increase in line with the forward gilt yield curve.
New business profits generated during the year amounted to £22 million after tax and represent the value of vesting pension policies not reflected in the opening MCEV. These arise from pension policies which have no attaching annuity guarantees.
The new business margin is five percent after tax and represents the ratio of the net of tax new business value to the amount received as new single premiums.
Non-economic experience variances and assumption changes The Life divisions' non-economic experience variances and assumption changes contributed £156 million to MCEV pro forma operating earnings after tax for the year ended 31 December 2009.
Favourable experience and other operating variances of £83 million primarily related to several management actions including the resolution of certain legacy issues, partially offset by the strengthening of regulatory capital requirements and capital policy in the life companies following the acquisition of the Pearl businesses by Phoenix Group Holdings. Favourable assumption changes of £73 million mainly relates to harmonisation of longevity assumptions across the Group and the results of an annuitant survival investigation.
The operating profit for management services comprises income from the life companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs.
Management services generated an operating profit before tax of £14 million for the year ended 31 December 2009, reflecting a business as usual outsourcer average expense per policy of £24. 1
Further on-going site rationalisation and staff reductions are expected to enhance annual cost savings, together with other initiatives related to the renegotiation of arrangements with outsourced service providers and aligning core business and administrative processes across the Group.
In the face of volatile economic conditions the fund management business recorded a pro forma operating profit before tax of £34 million for the year ended 31 December 2009.
| Pro forma | Year ended |
|---|---|
| £ million | 31 December 2009* |
| Retail revenue | 14 |
| Institutional and international revenue | 15 |
| Life fund revenue | 82 |
| Total revenues2 | 111 |
| Expenses2 | (77) |
| Ignis Asset Management operating profit before tax | 34 |
| * Includes 12 months of results of the Pearl businesses |
2 Revenues and expenses are stated net of rebates from collective investment schemes
Profits in the first half of the year were impacted by a number of factors, including significantly lower equity market levels and the depressed conditions of the commercial property market which resulted in a reduction in average funds under management and consequently lower fees. Equity markets improved significantly in the second half of the year and the commercial property market is also showing signs of recovery.
1 Recurring outsourcer expenses for the year divided by the average number of in-force policies for the year (7.4 million). The policy count is based on the Pearl businesses average policy count for the year.
Group performance – MCEV (continued)
The following diagram shows the development of assets under management during the year.
Assets under management development £ billion
1 Includes third party market movements of £0.7 billion and life companies market movements of £3.7 billion.
Internal funds under management reduced by £0.9 billion (1.5 percent) to £60.1 billion in the 12-month period as positive changes in market values of £3.7 billion offset the run-off of the closed life business of £4.6 billion.
In line with the Group strategy to consolidate fund management under Ignis Asset Management £1.3 billion of Phoenix Life assets currently managed by a third party are due to be transferred to Ignis Asset Management in 2010. In addition, approximately £5.5 billion of Life funds managed by a third party on a passive basis are being transferred to Ignis Asset Management in 2010 where they will be managed on an active basis. The Board is confident this will enhance policyholder returns, and will also benefit owners as the Group moves to managing the assets on a single platform on a consistent basis.
Third party inflows were £1.3 billion in the year mainly reflecting strong sales in retail products and liquidity funds on the back of improving market sentiment and strong investment performance. The liquidity fund outperformed the Institutional Money Market Funds Association ("IMMFA") sector by 57 basis points achieving a gross total return of 1.63 percent over 2009.
As discussed on page 12 the Group's business structure includes a Corporate Office that provides a coordination and oversight function. The Corporate Office's operating loss of £54 million before tax for the year ended 31 December 2009 includes:
Group MCEV operating earnings is reconciled to the Group MCEV earnings, as follows:
| Pro forma £ million |
Year ended 31 December 2009* |
|---|---|
| Group MCEV operating earnings after tax | 269 |
| Economic variances on covered business | 701 |
| Economic variances on non-covered business | (245) |
| Non-recurring items | (78) |
| Gain on debt refinancing | 491 |
| Finance costs attributable to owners | (390) |
| Tax on non-operating earnings | (197) |
| Group MCEV earnings after tax | 551 |
* Includes 12 months of results of the Pearl businesses
Positive economic variances in 2009 of £504 million after tax reflect the benefit of the reduction in credit spreads on corporate bonds and favourable equity and yield movements, partially offset by an increase of £36 million in the market value of listed debt issued by Phoenix Life Limited (ex Scottish Mutual Assurance).
The economic variances on non-covered business of £245 million before tax primarily relates to the increase in the market value of listed debt issued by the Group's subsidiary Pearl Group Holdings (No. 1) Limited and Phoenix Group Holdings' warrants, which reduced MCEV earnings by £169 million and £51 million respectively. In addition, the economic variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to its capital injection into the Pearl businesses. Having reduced its euro cash holdings, Phoenix Group Holdings' exposure to foreign exchange fluctuations has reduced.
Non-recurring items reduced pro forma embedded value by £78 million before tax and primarily includes:
30 Phoenix Group Holdings Annual Report & Accounts 2009
Group performance – MCEV (continued)
As part of their acquisition by Phoenix Group Holdings, the Pearl businesses successfully refinanced their external borrowings resulting in an overall reduction of £575 million in exchange for cash and an issue of warrants totalling £84 million.
| Pro forma £ million |
Year ended 31 December 2009* |
|---|---|
| Debt finance costs1 | 176 |
| Debt issue costs | 202 |
| Other finance costs | 12 |
| Finance costs attributable to owners | 390 |
* Includes 12 months results of the Pearl businesses
1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes
Debt finance costs include interest of £142 million on the holding company debt for the eight-month period prior to the refinancing (as discussed above) and interest on the refinanced debt on amended terms thereafter of £34 million for the final four-month period.
As part of Phoenix Group Holdings' acquisition of the Pearl businesses and debt restructure, fees of £202 million were paid to the banks as consideration to facilitate the transaction. The consideration was in the form of equity issued to the lenders by Phoenix Group Holdings and therefore resulted in a corresponding increase in capital. Under IFRS these debt issue costs are taken into account in determining the cost of acquisition of the Pearl businesses.
Tax on non-operating earnings includes £199 million of tax relating to economic variances and non-recurring items related to covered business.
The Group MCEV increased by £783 million over the year to £1,827 million at 31 December 2009. The increase was mainly due to MCEV profits generated in the year, as discussed above, of £551 million, capital movements of £290 million offset by other comprehensive income items of £58 million.
75 percent increase in MCEV to £1,827 at 31 December 2009.
Certain changes have been made to the previously reported embedded value of the Pearl businesses. These changes have been implemented to align the methodology more closely with the CFO Forum principles.
As Opal Re is now part of the Group it is included within covered business from 31 December 2008 and is valued on a basis consistent with the annuity business within the life companies.
Asset management and management service companies have been excluded from the definition of covered business. Under CFO Forum principles and guidance productivity gains should not be recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management services companies, it would not provide a fair reflection of the Group's financial position. These companies are therefore reported alongside the Group's other non-life Group companies at their IFRS net asset value.
The allowance for default risk has been increased to include an explicit margin for unexpected default risk premium. This reduces the value of liquidity premiums within the MCEV. This change is to align the Group's methodology with the risk-neutral principles that form the basis of the CFO Forum's MCEV methodology.
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
The Group has delivered a strong performance despite the generally unstable economic and financial conditions.
The Group generated an IFRS operating profit1 of £282 million for the year ended 31 December 2009. This operating profit represents four months of the results of the Pearl businesses which came under the control of Phoenix Group Holdings for accounting purposes with effect from 28 August 2009. The pro forma IFRS operating profit for the year ended 31 December 2009 is £457 million.
This performance demonstrates the strength of the Group's run-off business model:
| £ million | Year ended 31 December 2009 |
Year ended 31 December 2009 (pro forma)* |
|---|---|---|
| IFRS operating profit | ||
| Phoenix Life | 285 | 469 |
| Ignis Asset Management | 14 | 34 |
| Corporate costs | (17) | (46) |
| Operating profit before tax2 | 282 | 457 |
* Includes 12 months of results of the Pearl businesses
The pro forma IFRS operating profit before tax of £457 million reflects the positive performance of the Pearl businesses throughout the year. The post acquisition performance was relatively stronger than the year as a whole which is a reflection of the improved market conditions in that period relative to the first half of the year.
The life funds' performance benefited from improving market conditions, narrowing credit spreads, several planned management actions and improving non-economic experience throughout the year.
Ignis Asset Management's performance was favourable throughout the year generating a pro forma IFRS operating profit before tax of £34 million. The post acquisition period reflects the recovery in corporate bonds and equity markets.
The following commentary focuses on the reported results of the Group.
| £ million | Year ended 31 December 2009 |
|---|---|
| With profit | 20 |
| With profit where internal capital support provided | 30 |
| Non profit and unitlinked | 201 |
| Longer term return on owners' funds | 17 |
| Management services | 17 |
| Phoenix Life operating profit before tax2 | 285 |
The owners' one-ninth share of policyholder with profit bonus of £20 million in the four-month post-acquisition period reflects the impact of lower terminal bonuses in 2009 following difficult market conditions. The market recovery in the financial investments backing the with profit business experienced in the latter half of the year is expected to be considered in bonus rates in 2010 along with the market performance for the first half of 2010.
The operating profit on with profit funds where internal capital support has been provided was £30 million in the four-month post-acquisition period. The operating profit benefited from the impact of several management actions and harmonisation of longevity improvement factors across the Group and using updated industry tables. These favourable impacts were partially offset by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
The operating profit on non profit and unit linked funds was £201 million in the four-month post-acquisition period. This includes margin emergence and return on surplus assets of £52 million. This return was supplemented with favourable non-economic experience variances as well as assumption changes related to longevity (as discussed above) which were only partially offset by increased provisions for expenses as some funds moved from being managed on a passive to an active basis.
The longer term return on owners' funds for 2009 of £17 million reflects the asset mix of owners' funds, primarily cash-based assets and fixed interest securities.
The operating profit for management services of £17 million comprises income from the life companies in accordance with the respective management service agreements less fees payable in relation to the outsourcing of services and other operating costs.
The Group's two asset management businesses have recently been integrated under the Ignis brand, with the aim of enhancing the brand and revenue generation of the asset management businesses.
Continued improvements in market conditions in the second half of 2009 had a positive impact on the results of the combined asset management business. Ignis Asset Management recorded an operating profit of £14 million in the four-month post-acquisition period.
Corporate office costs and project spend amounted to £8 million. The balance of the charge relates primarily to the net expected return on the pension scheme and share-based payment charges on warrants issued.
IFRS operating profit is reconciled to profit after tax, as follows:
| Year ended | |
|---|---|
| £ million | 31 December 2009 |
| Operating profit before adjusting items | 282 |
| Investment return variances and economic assumption changes | |
| on long-term business | 145 |
| Variances on owners' funds | (70) |
| Amortisation of acquired in-force business and other intangibles | (52) |
| Non-recurring items | (105) |
| Profit before finance costs attributable to owners | 200 |
| Finance costs attributable to owners | (49) |
| Profit before tax attributable to owners | 151 |
| Tax attributable to owners | (16) |
| Profit for the year attributable to owners | 135 |
| Attributable to: | |
| Owners of the parent | 95 |
| Non-controlling interests | 40 |
Group operating profit – IFRS (continued)
The expected return on investments for both policyholder and owners' funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived based on market yields on risk-free fixed interest assets at the start of each financial year. Margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties. The principal assumptions underlying the calculation of the longer term investment return are set out in note 5 to the IFRS financial statements.
Overall, the Phoenix Life business had net favourable investment return variances and economic assumption changes of £145 million for the four months ended 31 December 2009, largely reflecting narrowing credit spreads, stronger performance on hedge funds and favourable property returns.
The unfavourable variances on owners' funds of £70 million for the four months ended 31 December 2009 primarily relates to the increase in the fair value of the Phoenix Group Holdings' warrants which are accounted for as a financial liability. In addition the variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to the acquisition of the Pearl businesses.
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 Pearl businesses.
The acquired in-force business is being amortised in line with the run-off of the acquired businesses. Amortisation of acquired in-force business during the period totalled £45 million. Amortisation of other intangible assets totalled £7 million in the period.
For further information on these intangible assets refer to notes 3 and 33 to the IFRS financial statements.
Non-recurring items include:
| Year ended | |
|---|---|
| £ million | 31 December 2009 |
| Debt finance costs1 | 34 |
| Other finance costs | 15 |
| Finance costs attributable to owners | 49 |
1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes
The Group tax charge for the year attributable to owners is £16 million. This represents an effective tax rate of 11 percent on profits (after policyholder tax) of £151 million.
The Company is exempt from tax in the Cayman Islands on any profits, income and gains for a period of 20 years from 15 January 2008. Consequently no tax was due from the Company in 2008 or 2009.
With effect from the acquisition of the Pearl businesses the Company has been managed and controlled from Jersey, where its permanent office premises are located, and as a Jersey resident holding company the Company is expected to be subject to a zero percent tax rate on its income. Consequently tax charged in these Accounts primarily represents UK tax on profits earned in the UK, where the principal life companies, excluding Opal Re, have their centre of operations.
The effective tax rate for 2009 has been impacted by a number of one-off events. These include the restructuring of National Provident Limited ("NPL"), which crystallised operational losses incurred in prior years, but not previously recognised for tax purposes, of £250 million.
As a result of tax losses brought forward and the losses realised by NPL in the year, the Group is not expected to pay any shareholder tax in 2009 and has significant excess tax losses and expenses at the end of the year which have not been recognised in full.
The Group's Capital Management Framework is designed to achieve the following objectives:
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the objectives under a range of stress conditions. The policies are defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.
The capital policy of each Group holding company is set by the Board of Phoenix Group Holdings and monitored each month at both executive and Board level. The policies ensure sufficient liquidity to meet creditor obligations and dividend expectations through the combination of cash buffers and strong cash flows from the Group's operating companies. Volatility in the latter is monitored at the executive and Board level through stress and scenario testing. Where cash flow volatility is judged to be in excess of the Board's risk appetite, de-risking activities are undertaken.
The capital policy of each life company is set by each life company board and monitored on a daily basis. These policies ensure there is sufficient capital within each life company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each life company varies according to the risk profile and financial strength of the company.
Each UK life company must retain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA. In addition to EU-directive-based "Pillar 1" and group capital requirements, the FSA has also stipulated a "Pillar 2" of risk-based capital requirements that have been implemented in the UK. A life company's actual capital requirement is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company. Each life company generally holds an amount of capital that is greater than the minimum required amount to allow for adverse events in the future that may use capital and might otherwise cause the company to fail the minimum level of regulatory capital test.
With the exception of with profit businesses, the regulatory capital requirement under Pillar 1 is the total amount held in respect of investment, expense and insurance risks (the long-term insurance capital component ("LTICR")) and any additional amounts required to cover the more onerous of two specified stress tests (the resilience capital requirement ("RCR")). The regulatory capital requirement is then deducted from the available capital resources to give the regulatory basis excess capital.
A further test is required under Pillar 1 in respect of with profit funds which may result in an additional capital requirement referred to as the With profit Insurance Capital Component ("WPICC").
Over £1.2 billion of IGD surplus.
The Pillar 2 capital requirements are based on a self-assessment methodology, the Individual Capital Assessment ("ICA"). This methodology determines the capital requirement to ensure that the life company's realistic liabilities can be met in one year's time with a 99.5 percent confidence level, or a one in 200 year event. The FSA reviews each life company's ICA and may impose additional capital requirements if necessary in the form of Individual Capital Guidance.
FSA regulated insurance groups (including their holding companies) are also required to provide an assessment of capital adequacy on a group-wide basis to enable the FSA to assess both the level of insurance and financial risk within the group and the capital resources available to cover that risk. The assessment is known as the IGD and is the Group's primary capital and solvency measure.
The Group's IGD assessment is made at the highest EEA level insurance group holding company, which is PLHL. PLHL is a subsidiary of Phoenix Group Holdings.
The components of the estimated IGD calculation are shown below:
| £ billion | Year ended 31 December 2009 |
|---|---|
| Group capital resources ("GCR") | 5.0 |
| Group capital resource requirement ("GCRR") | (3.8) |
| IGD surplus | 1.2 |
Estimated IGD surplus has increased by over £0.5 billion in the year.
The estimated IGD surplus has increased by over £0.5 billion from 1 January 2009 to £1.2 billion at 31 December 2009. The estimated IGD surplus at 31 December 2009 represents 132 percent coverage of regulatory requirements, compared to an operating target of 125 percent. The key drivers of the improved solvency position are:
(continued)
* This amount includes £52 million of established surplus on non profit business.
As part of the Group's internal risk management processes the estimated IGD surplus is tested against a number of financial and non-financial scenarios to ensure it remains in excess of the 125 percent target in a range of reasonably foreseeable circumstances. The results of that stress testing are provided below:
| £ billion | Year ended 31 December 2009 |
|---|---|
| Estimated IGD surplus | £1.22 (132% margin) |
| Estimated IGD surplus following a 20 percent fall in equity markets | £1.21 (144% margin) |
| Estimated IGD surplus following a 15 percent fall in property values | £1.21 (134% margin) |
| Estimated IGD surplus following a 75bps parallel decrease in yields | £1.23 (131% margin) |
| Estimated IGD surplus following credit spread widening1 | £1.12 (131% margin) |
| Estimated IGD surplus following a combined 20 percent fall in equity | |
markets, 15 percent fall in property, 75 bps fall in yields and credit spreads widening1 £1.14 (144% margin)
The GCRR includes a WPICC which is matched by GCR in the with profit funds. In stress scenarios, as the value of GCR falls, it is broadly offset by a corresponding decrease in the WPICC within the GCRR. Therefore, although both GCR and GCRR decline, the IGD surplus is not impacted to the same extent, which can cause the percentage margin to increase in stress scenarios.
The primary sources of capital used by the Group covering individual life company and Group capital requirements are equity, perpetual reset capital securities, subordinated debt and other borrowings.
Details on the Group's objectives and policies for the management of liquidity risk are included within the Risk management report and note 42.3.3 of the IFRS financial statements.
Solvency II represents a new solvency framework for EU insurers that will replace all existing prudential regulation including Solvency I, Realistic Balance Sheets, ICA and the IGD. It is expected to come into force on 31 October 2012 and comprises a three-pillar approach that includes a formulaic minimum capital requirement (similar to the current ICA regime), supervisory review of the Group's own risk assessment and prescribed disclosure requirements.
Solvency II was adopted in the European Parliament on 22 April 2009 and the high level principles agreed in the "Level 1 Framework Directive" on 5 May 2009. The Committee of European Insurance and Occupational Pensions Supervisors ("CEIOPS") is currently consulting with the industry on the technical specifications of the formulaic capital requirements.
The Group expects Solvency II to result in an improved understanding of the link between risk and capital management and welcomes the increased focus on risk management that Solvency II will bring. The Group is concerned however, that the recent final advice from CEIOPS is more prudent than the Level 1 Framework Directive and more onerous than the existing Pillar 2 regime, in particular for annuity business. As currently drafted, the technical specifications would result in a significant increase in the capital requirements of the industry and the Group is currently working with the Association of British Insurers ("ABI") and other UK insurers through membership of the ABI's Solvency II working group with a view to ensuring that the final specifications are appropriate for the UK insurance market.
The Group's Solvency II programme was started in 2008 with its involvement in the fourth Quantitative Impact Survey exercise. The programme spans all areas of the business with multi-discipline workstreams in place. Due to the complexity of the Group's insurance business and the number of smaller life companies within the Group, the Group will pursue a partial internal model approach to Solvency II and will seek approval from the FSA to utilise its own risk assessment models for the material insurance entities within the Group. The formulaic approach will be adopted for smaller insurance entities such as Scottish Mutual International and the Group's general insurance business. Regular dialogue continues with the FSA that is focused on ensuring the Group is well positioned to achieve Wave 1 approval for its own internal model application.
Risk management is an essential part of the Group's strategic agenda.
Risk management Risk management is an essential part of the Group's strategic agenda. The Board seeks to ensure that the Group understands and manages its risks accordingly; to either create additional value for its stakeholders or to mitigate any potentially adverse effects.
A risk framework is in place which seeks to establish a coherent and interactive set of risk management arrangements comprising formal committees, risk review functions, risk management policies and risk assessment processes. This framework allows informed decisions to be made by the relevant statutory and regulated entity boards and senior management. The framework defines how risks taken by the Group are managed and mitigated ensuring that initiatives are not evaluated purely in terms of the potential returns, but also in terms of the range of potential outcomes which may arise and their relative likelihood. The framework provides assurance that risks are being appropriately identified and managed and that an independent assessment of management's approach to risk management is being performed.
Overall responsibility for approving, establishing and maintaining the risk framework rests with the Group Board. The Board recognises the critical importance of having efficient and effective risk management systems and appropriate oversight of their output. A clear organisation structure with documented, delegated authorities and responsibilities from the Phoenix Group Holdings Board to the Board of PLHL and ExCo is in place.
A series of divisional management oversight committees covering financial and operational risks exists within the Group. These committees are responsible for ensuring the risks associated with the divisional business activities are identified, controlled, monitored and reported to the relevant boards and board committees.
Each committee has formal terms of reference which are approved by the relevant divisional group executive team. Overall reporting of risk management and escalation of emerging issues is undertaken through divisional management committees to ExCo and reported to the PLHL and Group Boards.
Risk management is an evolving landscape and developments to augment risk culture and governance across the Group will continue. Actions taken recently include the appointment of a Group Chief Risk Officer in November 2009, the establishment of a Phoenix Group Holdings Board Risk Committee in early 2010 and improvements in consolidated risk reporting in line with current best practice. The Group sees these enhancements as key to supporting further strengthening of the Group's risk culture and maintaining it in line with current best practice guidelines.
The Group's risk management framework is underpinned by its governance model which includes statutory boards, management boards, risk policies, oversight committees and established governance functions.
The Group operates a Three Lines of Defence model:
The Phoenix Group risk appetite framework consists of a set of statements that articulate the risk appetite of the Group Board with respect to policyholder security, earnings volatility, liquidity and regulatory compliance.
A range of high level metrics and reporting mechanisms is in place to monitor risk appetite across the Group. Breaches of appetite are corrected through management action when appropriate.
Further development work is underway to establish risk appetite limits and trigger points in terms of capital and earnings impact, and ensure that such limits are aligned with capital resources and owner expectations.
The Group has a standardised assessment framework for the identification and assessment of the different types of risk it may be exposed to and how much capital should be held in relation to those exposures. This framework is applicable across the Group as a whole and establishes a basis of consistency not only for the approach to risk assessment, management and reporting processes but also for determining and embedding capital management at all levels of the Group.
Risk assessment activity is a continuous process and is performed on the basis of identifying and managing the significant risks to the achievement of the Group's objectives. Stress and scenario tests are used to support the assessment of risk and analysis of the financial impact. The Board Committees, ExCo, senior management and specialist functions (e.g. Finance, Risk and Actuarial) review the various outputs of the risk assessments. A Group-level risk assessment process determines the most significant risks to the Group and the options available for their management. An overview of the key risks and uncertainties facing the Group is provided below.
42 Phoenix Group Holdings Annual Report & Accounts 2009
Risk management
(continued)
Group and the divisional operating units' risk functions provide oversight of the risk management processes across the Group. A central risk function is being created with responsibility for the oversight of the risk management framework, policy and standards across the Group. Risk review functions in each of the business units manage the framework in line with these standards. Their responsibilities include the evaluation of changes in the business operating environment and business processes, the assessment of the impact of these changes on risks to business and the monitoring of the mitigating actions. The risk functions also ensure that divisional risk committees are provided with meaningful risk reports and that there is appropriate information to assess risks.
A policy framework exists, which sets out the high level risk appetite of the Group, together with risk management, internal control and business conduct standards for the Group's operating units.
The policies define:
Each policy is the responsibility of a member of ExCo who is charged with overseeing compliance with the policy throughout the Group.
| Risk | Impact | Mitigation |
|---|---|---|
| In times of extreme market turbulence, the Group may not have sufficient liquid assets to meet its payment obligations or may suffer a loss in value. |
The Group has ongoing obligations to meet payments to creditors which are funded by the release of capital and profits from the underlying operating companies. The emerging cash flows of the Group may be impacted during periods of extreme 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 embedded value, financial condition and prospects. |
The Group undertakes regular monitoring activities in relation to market risk exposure, including the monitoring of asset mixes, cash flow forecasting and stress and scenario testing. In response to this, the Group may implement de-risking strategies to mitigate against unwanted outcomes. The Group also maintains cash buffers at the holding company level to reduce reliance on emerging cash flows. |
| The potential limitation on distributions from the Group's FSA regulated companies may impair the ability of the Group to service its existing debt commitments. |
The Group has ongoing principal repayment and interest obligations to a syndicate of lenders. In the event that transfers from the Group's insurance and investment management subsidiaries are limited by any law or regulatory action, this may impair the Group's ability to service these obligations. The implementation of directives and other legislative changes such as Solvency II could have this effect and may therefore have a material adverse effect on the Group's results, financial condition and cash flows, including the exercise by the external finance providers of their security rights over shares in Group companies. |
The Group puts considerable efforts into managing relationships with our regulators so that we are able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on our operations and lobbies where appropriate. |
| Significant counterparty failure. | The Phoenix Life segment is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities or from trading counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under reinsurance arrangements or derivative counterparties or stock-borrowers failing to pay as required. Assets held to meet obligations to policyholders include debt securities. An increase in credit spreads on such securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group's financial condition. |
The Group regularly monitors its counterparty exposure and has specific limits relating to counterparty credit rating. Where possible, exposures are diversified through the use of a range of counterparty providers. All reassurance and derivative positions are appropriately collateralised and guaranteed. |
| Adverse changes in experience versus actuarial assumptions. |
The Group has liabilities under annuities and other policies that are sensitive to future longevity and mortality rates. Changes in assumptions may lead to changes in the assessed level of liabilities to policyholders. The amount of additional capital required to meet those liabilities could have a material adverse impact on the Group's embedded value, results, financial condition and prospects. |
The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions. |
| Competition and the ability to finance acquisitions may make it difficult for the Group to grow. |
There are other closed fund consolidators as well as a number of other potential purchasers. While the prices of closed fund life companies and portfolios may have decreased due to recent market conditions, there can be no assurance that prices will not increase if markets continue to recover. Moreover, the Group may face difficulties in obtaining additional third party financing for any acquisitions. |
The Group is well positioned to be the natural consolidator for closed funds and although there are no immediate plans for further acquisitions the Group continually monitors market developments. |
A more detailed analysis of the Group's inherent exposures to key financial and insurance risks, including the Group's specific objectives and policies for managing its market, credit, liquidity and insurance risks are set out at note 42 to the Financial Statements.
The value of our organisation is directly related to the trust our stakeholders have in the integrity and sustainability of our business model
46 Phoenix Group Holdings Annual Report & Accounts 2009
"Our commitment to Corporate Responsibility helps us to create more valuable relationships with our stakeholders, by demonstrating robust management of the non-financial risks that may affect our ability to deliver our strategic ambitions." Jonathan Moss Group Chief Executive
How we continue to attract, develop and retain the best people is a key focus for us.
* All references to 2009 achievements and performance indicators in the Corporate Responsibility report are for the full year, encompassing the achievements of the Pearl businesses from 1 January 2009.
Our commitment to managing a responsible business will help create long-term value.
In strategic terms, a responsible management approach to non-financial issues such as customer service and employee engagement will directly affect our ability to succeed. Investment in corporate responsibility therefore represents a significant opportunity for our business, creating value through enhanced stakeholder trust in our business.
In order to capitalise on these opportunities, we need to protect our reputation through robust non-financial risk management. This risk management process shows us where to focus the energies of our corporate responsibility activity. In 2009, this has involved the identification, analysis, mitigation and reporting of material non-financial risks (as set out in this section) and is the essence of our early-stage Corporate Responsibility programme. However, we aim to reinforce our commitment to building a sustainable business model by more closely aligning this process with our business strategy and Group values.
Issues of interest to our stakeholders, many of which are important non-financial opportunities or risks, can be grouped around four areas:
The Group employs over 1,000 people in four main locations in the UK. These employees are key players in the success of our business; therefore building an engaged, productive workforce offers our business significant opportunities to enhance our business performance that benefits customers, owners and employees alike.
We developed a set of employee values in 2009, which are described in full in the Corporate Responsibility section of our website. They were developed with our employees and carry the full support of the Board. They reflect our view that a key strategic objective is to attract, develop and retain the best talent and that a failure to do this would pose a significant risk to the long-term success of our business.
Our employee policies and practices are designed to meet the needs of our employees, the business, the regulatory environment and the expectations of stakeholders, including policyholders and owners. The Group's strategy towards its employees is to 'enable the organisation to optimise the contribution of its employees'. At the heart of this strategy is the commitment to create an environment in which all our employees have high levels of engagement and so feel able to contribute to and share in the future success of the business.
Phoenix Group Holdings Annual Report & Accounts 2009 47
Corporate responsibility
In the context of the Workplace, key policies and practices include:
A survey was carried out across all parts of the Group (excluding Ignis Asset Management) in order to measure and assess engagement levels and gather feedback from our employees. An overall internal "Engagement Index" score of 60 percent was achieved, which was very encouraging in the context of a first survey and the challenging market and economic conditions. This is a good foundation on which to build and we aim to achieve industry benchmark standards in coming years.
In common with many other firms, we have been affected by the impact of the global recession and the turmoil in financial markets. These issues, combined with the legacy of acquisitions, have placed considerable demands on our employees, particularly as we create the organisational foundations to achieve significant and maintainable economies of scale throughout our operations, on which to build a profitable and sustainable future.
These challenges have necessitated some difficult decisions regarding our employees and the need to reposition the Group in terms of organisational infrastructure and looking forward to the changing cost/income dynamics of our business. On top of this, as a major insurance industry "consolidator", the Group constantly looks at ways to improve service and financial returns to our customers; this inevitably, on occasions, necessitates organisational restructuring.
As part of this ongoing programme of service improvement, the Group's life office in Glasgow and its Peterborough site are being closed and operations consolidated in Wythall, where new job opportunities are being provided and investment made to improve and enhance the offices and general working environment. We are very pleased that over 50 of our employees have so far relocated to Wythall. It has been necessary to make redundancies in Glasgow and Peterborough; the Group's approach to redundancies is to provide support which exceeds statutory requirements, which both helps affected employees and minimises the impact on the morale of those employees remaining.
Corporate responsibility (continued)
We believe it is important that our employees have the opportunity to align their interests, through share ownership with those of our owners. An employee Sharesave Scheme launched at the beginning of 2010 provided eligible employees the opportunity to join an Inland Revenue (Her Majesty's Revenue and Customs ("HMRC")) approved scheme. 64 percent of eligible employees elected to join the scheme, which exceeded expectations. We also launched a formal flexible benefits scheme in 2009, "Flexit", which provides eligible employees the opportunity to select, within defined parameters, benefits that suit their lifestyle and personal circumstances.
The Group is committed to providing appropriate learning and development for every one of its employees, with development needs linked to the achievement of agreed personal and business objectives. In particular, the Group considers it important that all its employees understand and operate in accordance with high standards of business practice. A "Business Ethics" training programme has been developed to assist employees in ensuring they do not act in a way which could harm others and bring either themselves or the Group into disrepute.
The Human Resources function monitors numerous employee metrics (employees being our key non-financial risk) and reports in comparison to previous years. This enables analysis of year-on-year employee trends and performance against comparable companies.
In 2009, annual employee turnover (employees choosing to leave voluntarily) was 3.8 percent (2008: 5.8 percent1 ). Annual new starter turnover (number of employees leaving voluntarily within 12 months of starting) was 7.3 percent (2008: 10.3 percent1 ). The percentage of days lost through sickness was 1.6 percent (2008: 1.5 percent1 ). The percentage of employees sponsored on a Professional Qualification was 21.1 percent (the comparable amount for 2008 is not available).
The year-on-year fall in both overall annual employee and new starter turnover is primarily the result of the recent slow down in the economy and general reduction in employment opportunities nationally. Despite the challenges which have faced the Group, it is encouraging to note there has been only minimal increase in the percentage of days lost through illness.
"Our marketplace is where we work to achieve the best possible outcomes for our customers. Our aim is to provide a safe home for customers' policies – with great care and intelligence applied to protecting and enhancing value wherever possible." Mike Merrick Chief Executive, Phoenix Life
Corporate responsibility
Maintaining positive and effective relationships with our customers can only be achieved through the successful integration of functions, disciplines and the interests of relevant stakeholders. Our objective is to sustain appropriate capital and liquidity, provide tangible and robust standards of Governance and Risk Management, give confidence to investors, and maintain and enhance our reputation by transparently evidencing that all of this is in place.
The open description and reporting of our Governance and Risk Management architecture is fundamental to the interests of investors and customers.
Our Customer Services teams are focused on establishing and maintaining appropriate standards of service provided by our outsource partners. These standards are contracted through a sophisticated structure of service level agreements and monitored through regular reporting and key performance indicators which report to and are monitored by senior management. We have put processes in place that enable us to elevate significant issues quickly to senior management.
Our relationship with our Regulators and their confidence in us are also important in maintaining stakeholder confidence; compliance as a function is, therefore, also a key element in how we manage our business and interact credibly with our customers.
Our Strategic Treating Customers Fairly ("TCF") proposition Our strategic TCF proposition comprises five objectives:
The Group supports industry-led initiatives. An example of this is the ABI sponsored initiative Origo Options, the aim of which is to speed up processing times for customers wishing to take an open market option. Moving forward, we intend to extend this service to pension-to-pension transfer transactions to ensure that our customers benefit from a more efficient and faster process. In an industry where market conditions fluctuate, this will mean that our customers have greater control over their money. We also continue to participate in the ABI Customer Impact Scheme and support its customer commitments which are relevant to our business.
Providing relevant and timely information to our customers is key to us, keeping them informed throughout the product lifecycle, including posting any unclaimed funds to the Unclaimed Assets Register.
The results of our participation in the scheme were helpful in focusing where we are doing well and where we are not doing so well.
Whilst we are pleased that there has been an increase in our "excellent" and "very good" service scores, the percentage of customers rating their experience as poor remained the same as in the previous year. This is something we are aiming to improve.
50 Phoenix Group Holdings Annual Report & Accounts 2009
Corporate responsibility (continued)
As the survey has highlighted, customers throughout the industry continue to have concerns regarding "return on investment" and "complaint handling". We are doing a number of things to address them. For example, on complaint handling we are creating a Complaints-Handling Guide, to be used by all of our companies.
Continued progress has been made during 2009 in the implementation of our outsource strategy. This will enable the Group to budget more effectively as we have aligned the cost to run-off policies at competitive contractually agreed rates.
The Group is committed to and has made good progress during 2009 in achieving further economies of scale by embedding its procurement policy throughout the Group. This policy sets the minimum standards by which the Group expects each division to operate, thereby creating a consistent framework for management and governance.
The Group believes that its commitment to the Community leads to greater employee engagement and is attractive to potential employees. It helps us to attract and retain the best talent.
During the year a total of £91,786 was donated by the Group for charitable purposes. This included donations in recognition of employees giving their time to volunteer for charities, matching money raised through employee fundraising efforts, as well as small donations in response to requests from a number of national charities and those based close to the Group's sites.
Donations during 2009 of more than £2,000 included:
| Citizens Advice Bureau | £10,000 |
|---|---|
| British Heart Foundation | £6,287 |
| Cancer Research UK | £3,003 |
| The Prostate Cancer Charity | £2,427 |
| Acorns Children's Hospice Trust | £2,277 |
| The Multiple Sclerosis Society of Great Britain and Northern Ireland | £2,249 |
Our commitment to and interaction with the communities in which our people and customers live and work are important for us.
Phoenix Group Holdings Annual Report & Accounts 2009 51
Corporate responsibility
Employees are encouraged to organise office-based fundraising activities for charities they nominate. This is an important aspect of team building and employee engagement. During 2009, in addition to the donations by the Group, employees raised over £18,000 for registered charities.
The Group is committed to playing an active role in the wider community through supporting local initiatives.
2009 was the 13th successive year that Ignis Asset Management was the title sponsor of the annual Women's 10k Road Race in Glasgow, with approximately 12,000 women involved, raising money for numerous charitable causes. The Group has also been the proud sponsor, since 2007, of Partick Thistle Football Club and in 2009 agreed a three-year sponsorship deal with Middlesex County Cricket Club.
Our impacts are not significant in scale, but good environmental practice at any level is valuable and is of increasing interest to our stakeholders.
Whilst we have some way to go, we have made encouraging progress in providing an effective recycling infrastructure at our main sites.
The Group provides recycling opportunities within all their UK sites. The consolidation of the main life company operations into the Wythall site will continue to provide further opportunities to reduce the Group's carbon footprint as travel between sites reduces and energy consumption requirements continue to fall.
For more information on the Group's Corporate Responsibility programme, please visit the Corporate Responsibility section of the Group's website at www.thephoenixgroup.com
Good environmental practice is of increasing interest to our stakeholders, particularly our employees.
To effectively balance the needs of policyholders and shareholders it is crucial that we have strong and effective governance arrangements
The Board, chaired by Ron Sandler, is responsible for the strategy of the Group and its strength reflects the Group's ambitions to remain the leading UK life assurer for closed fund business. The Board contains a majority of independent Non-Executive Directors, and its balance of complementary skills and experience is reflected in the Director profiles. Please see the Corporate governance report for details of the operations of the Board and its Committees.
Governance
Ron Sandler was appointed Chairman of the Company on 24 September 2009. He is also Chairman of Northern Rock plc, Paternoster Ltd and Ironshore Inc, and is an adviser to Palamon Capital Partners. Mr Sandler was previously Chief Executive of Lloyd's of London and Chief Operating Officer of NatWest Group. In 2002, at the request of the Chancellor of the Exchequer, he led an independent review of the UK Long Term Savings Industry. He is a recent past president of the Chartered Institute of Bankers. Mr Sandler is Chairman of the Board Nomination Committee.
Jonathan Moss has been Group Chief Executive of the Pearl businesses since 2006. He was previously Finance Director of the Pearl businesses and before that the Chief Actuary of AMP Life in Australia. Mr Moss has also previously been the Appointed Actuary of London Life and National Provident Life. Mr Moss was appointed to the Board of Directors of the Company on 2 September 2009.
Simon Smith became Group Finance Director of the Pearl businesses in 2006, having joined in 2005 following the acquisition of the Pearl life companies from Henderson. He is a Chartered Accountant with 18 years' experience in the fund management and life insurance sectors, initially in tax management and structuring. Mr Smith was appointed to the Board of Directors of the Company on 2 September 2009.
From left to right: Ron Sandler Jonathan Moss Simon Smith Ian Cormack Alistair Lyons Ian Ashken David Woods Tom Cross Brown Manjit Dale Hugh Osmond David Barnes Charles Clarke Rene Pierre Azria Isabel Hudson
Governance
Senior Independent Director & Audit Committee Chairman Alastair Lyons was appointed to the Board of Directors of the Company as Senior Independent Director on 29 March 2010. He is also Chairman of Admiral Group plc, the FTSE-100 direct motor insurer, Chairman of Serco Group plc, the FTSE-100 international services company, and Deputy Chairman-designate of Bovis Homes Group plc. He is additionally Chairman of Cardsave Limited and Legal Marketing Services Limited. In his executive career he was Director of Corporate Projects at National Westminster Bank plc, Chief Executive Officer of the National Provident Institution, executive Director of Abbey National, responsible for the insurance division, and Chief Executive Officer of National Provincial Building Society. He is a fellow of the Institute of Chartered Accountants and has been a Non-Executive Director of both the Department for Work and Pensions and the Department for Transport. Mr Lyons is Chairman of the Board Audit Committee.
Ian Ashken is Vice Chairman and Chief Financial Officer of Jarden Corporation, a NYSE listed Fortune 500 U.S. diversified consumer products company. Mr Ashken has had extensive public company experience over the last 20 years, including as Chief Financial Officer of Benson Eyecare Corporation, Lumen Technologies and Bollé Inc. Mr Ashken currently serves as an independent Director and head of the Audit Committee of GLG Partners, Inc. Mr Ashken is also a Principal and Executive Officer of a number of private investment entities. Mr Ashken was appointed to the Board of Directors of the Company on 2 September 2009.
Board of Directors
Governance
Rene-Pierre Azria is Chief Executive Officer of Tegris Advisors LLC, a U.S. private advisory firm specialising in strategic financial analysis and mergers and acquisitions. Prior to founding Tegris, Mr Azria was a worldwide partner with Rothschild & Co. Prior to joining Rothschild in 1996, Mr Azria served as Managing Director of Blackstone Indosuez and President of Financiére Indosuez Inc. in New York. Mr Azria serves as a Director and Compensation Committee member of Jarden Corporation, a NYSE listed Fortune 500 U.S. diversified consumer products company and of two privately-held book publishers in France and the U.S. Mr Azria was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Risk Committee.
David Barnes joined the RBS Group (then Williams & Glyn's Bank) in 1973 and remained there in various roles until his early retirement in February 2009. His roles included Relationship Banker in the then newly-established Corporate Division, Managing Director of the Financial Institutions Relationship Management team and member and subsequently Chairman of RBS's Credit Committee. From 2005 he was responsible for all lending to financial institutions and for capital management for RBS's Financial Institutions Group. Mr Barnes was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Audit and Board Remuneration Committees.
Charles Clarke is a Jersey-resident Chartered Accountant who spent some 30 years with KPMG. Having trained and qualified in London he was a financial sector audit partner in London, Kuala Lumpur and Jersey. He was also senior partner of the KPMG Channel Islands operation for seven years and, during his final year, Chairman of the grouping of KPMG member firms in offshore jurisdictions. Since retiring from KPMG at the end of 2005 he has established an offshore governance consultancy and Non-Executive Director recruitment service as well as accepting a number of NED and community appointments. Mr Clarke was appointed to the Board of Directors of the Company on 18 February 2010 and is a member of the Board Audit Committee.
Non-Executive Director & Remuneration Committee Chairman Ian Cormack is a Non-Executive Director of Aspen Insurance Holdings, the Qatar Financial Centre and the Qatar Insurance Service. Mr Cormack was Chief Executive Officer of AIG, Inc. in Europe from 2000 to 2002 and was Chairman of Citibank International plc and co-head of the Global Financial Institutions Client Group at Citigroup. Mr Cormack served on the Board of Directors of the former Pearl Group Limited from May 2005 to September 2009. He was appointed to the Board of Directors of the Company on 2 September 2009. Mr Cormack is Chairman of the Board Remuneration Committee and a member of the Board Nomination Committee.
Tom Cross Brown was Global Chief Executive of ABN AMRO Asset Management (which managed some €160 billion, with offices in 30 countries around the world) from 2000 to 2003, as well as Chairman of ABN AMRO Asset Management in the U.K. from 1997 to 2003. Prior to this, he was Chief Executive Officer of Lazard Brothers Asset Management in London, where he spent a total of 21 years. Mr Cross Brown is non-executive
Chairman of Just Retirement (Holdings) Limited, a Non-Executive Director of Bluebay Asset Management PLC and 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. Mr Cross Brown was appointed to the Board of Directors of the Company on 24 September 2009 and is a member of the Board Nomination and Board Risk Committees.
Manjit Dale is a founding partner of TDR Capital, a private equity firm established in 2002. TDR Capital manages over €2.5 billion of assets on behalf of a variety of institutional pension funds, university endowments and wealthy private individuals. Prior to founding TDR Capital, Mr Dale was Managing Partner at Deutsche Bank Capital Partners Europe. He has served on the Boards of Pizza Express and Center Parcs. Mr Dale has over 20 years' experience in private equity, finance and consulting gained with BankersTrust, 3i plc, NM Rothschild and Andersen Consulting. He served on the Board of Directors of the former Pearl Group Limited from December 2004 to September 2009. Mr Dale was appointed to the Board of Directors of the Company on 2 September 2009.
Isabel Hudson is a former Executive Director of Prudential Assurance Company Limited. She was also Chief Financial Officer at Eureko BV. Ms Hudson is a Non-Executive Director of QBE Insurance and The Pensions Regulator and a member of the With Profits Committee of Standard Life. Ms Hudson is Chairman of the business development Board of Scope, a UK charity, and has 29 years' experience in the insurance industry in the UK and mainland Europe. She was appointed to the Board of Directors of the Company on 18 February 2010 and is a member of the Board Risk and Board Remuneration Committees.
Hugh Osmond founded Punch Group and was its Executive Chairman between 1997 and 2001, during which time he built Punch Group into one of the U.K.'s largest pub companies. He previously co-led the acquisition and market listing of Pizza Express in 1993 and helped build it into the UK's largest sit-down restaurant chain. Mr Osmond served on the Board of Directors of the former Pearl Group Limited from December 2004 until September 2009. Mr Osmond also serves on the Board of Horizon plc. Mr Osmond was appointed to the Board of Directors of the Company on 2 September 2009 and is a member of the Board Risk Committee.
David Woods was appointed non-executive Chairman of Royal Liver Assurance in March 2003 and Director of Standard Life UK Smaller Companies Trust PLC in May 2005. He is a Non-Executive Director of Murray Income Trust plc and of The Moller Centre for Continuing Education. He is also Chairman of the Pension Fund Trustees for all the UK companies in the Steria Group and a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group. Mr Woods was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
As a Company incorporated in the Cayman Islands and listed on Euronext Amsterdam, the Company is not required to comply with the requirements of the UK Companies Act 2006. However, the Directors support enhanced standards for disclosure and have sought to comply voluntarily with these provisions.
Shareholder approval for the change of name of the Company from Liberty Acquisition Holdings (International) Company to Pearl Group was given on 24 July 2009 and the change of name took effect on 2 September 2009.
On 15 March 2010, the Company's shareholders approved a further change of name of the Company to Phoenix Group Holdings and the change of name took effect on that date.
On 29 June 2009, the Company announced that it had agreed to acquire a group of businesses that specialise in the consolidation and management of closed life and pension funds, referred to in this Annual Report and Accounts as the Pearl businesses.
The acquisition of the Pearl businesses was approved by shareholders on 24 July 2009 and the acquisition was completed on 2 September 2009. Information about the acquisition is given in note 3 to the IFRS financial statements.
The Company is incorporated in the Cayman Islands and has its head office in Jersey.
Information about the principal activities and strategy of the Company and the Group as a whole is presented in the Business and Strategy section on pages 10 to 15.
Neither the Company nor any of its subsidiaries undertake any research and development-related activities.
The audited IFRS financial statements for the year ended 31 December 2009 are set out on pages 76 to 157.
The reviewed MCEV supplementary information for the year ended 31 December 2009 is set out on pages 160 to 177.
The Group results for the year are shown in the consolidated income statement on page 78 and a review of these results and the MCEV results is presented in the Performance section on pages 22 to 35.
Information about the Group's financial KPIs is also provided in the Performance section on pages 18 to 21 with information on other non-financial KPIs presented principally within the Corporate Responsibility section on pages 46 to 51. The Performance section includes a review of the Group's operations, current position and future prospects for the Group.
Details of the principal risks and uncertainties facing the Group together with details about the Group's risk management framework are provided in the Performance section on pages 40 to 43. Further information about risk exposures and risk management policies is provided in note 42 to the IFRS financial statements.
Details of the Group's approach towards its employees and other stakeholders are presented in the Corporate responsibility section on pages 46 to 51.
Events which have taken place following the end of the reporting period are disclosed in note 48 to the IFRS financial statements.
The Group is exposed to financial risk through its financial assets, financial liabilities and policyholder liabilities. The key financial risk factors that affect the Group include credit risk, market risk and liquidity risk.
Information on the Group's exposure to these risks and the risk management approaches and methodologies applied to these risks is presented in note 42 to the IFRS financial statements.
As at the date of preparation of the statement of consolidated financial position, there was not a significant difference between the market value of land and buildings owned by the Company or any of its subsidiaries and the carrying value of these assets in the statement of consolidated financial position.
The directors are recommending a dividend for 2009 of €0.17 per share (2008: €nil).
Information on the Company's dividend policy is provided in the Group Chief Executive's Report on page 7.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Performance review on pages 18 to 43. The Performance review includes sections on the Group's performance (including cash generation), Capital management and Risk management. In addition, notes 41 and 42 to the IFRS financial statements include the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk.
The Board has followed the UK Financial Reporting Council's guidance "Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009" when performing their going concern assessment. As part of their comprehensive assessment of whether the Group and the Company is a going concern, the Board has undertaken a review of the valuation and liquidity of its investments as at the date of preparation of the statement of consolidated financial position. The Board has also reviewed solvency and cash flow projections under both normal and stressed conditions. The cash and solvency projections include the potential impact of the contingent liabilities stated in note 46 to the IFRS financial statements.
Having thoroughly considered the going concern assessment, including a detailed review of the regulatory capital and cash flow positions of each subsidiary company and the availability across the Group of a range of management actions, the Board has concluded that there are no material uncertainties that may cast significant doubt about the Group and the Company's ability to continue as a going concern. The Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
(continued)
The names and biographies of the current Directors are shown on pages 54 to 57.
During the year the following changes in Directors took place:
Upon the acquisition of the Pearl businesses on 2 September 2009, Martin Franklin resigned as Chairman and a Director, Nicolas Berggruen resigned as a Director, Dimitri Goulandris resigned as a Director, Ashley Silverton resigned as a Director and Miguel Pais do Amaral resigned as a Director.
Hugh Osmond, Manjit Dale, Ian Cormack, Jonathan Evans, Jonathan Moss, Simon Smith, René-Pierre Azria, Ian Ashken and David Barnes were appointed as Directors on 2 September 2009.
Jonathan Evans was appointed as Chairman on 2 September 2009 and resigned from this position on 24 September 2009. He resigned as a Director on 22 October 2009.
Ron Sandler was appointed as a Director and Chairman on 24 September 2009 and Tom Cross Brown was also appointed as a Director on that date.
In addition, Charles Clarke, Isabel Hudson and David Woods were appointed as Directors on 18 February 2010 and Alastair Lyons was appointed as a Director on 29 March 2010.
The interests of the Directors of the Company and their connected persons in the issued share capital of the Company are shown in the Remuneration report on page 72.
Details of related party transactions which took place during the year with Directors of the Company and entities where Directors are deemed to have significant influence are provided in this Directors' Report, the Remuneration report and in note 45 to the IFRS Financial Statements.
None of the service agreements or letters of appointment of the Company's Directors includes provisions for the payment of compensation for loss of office or employment.
The rules about the appointment and replacement of Directors are contained in the Company's Articles of Association ("the Articles"). These state that a Director may be appointed by an ordinary resolution of the shareholders or by a resolution of the Directors. If appointed by a resolution of the Directors, the Director concerned holds office only until the conclusion of the next Annual General Meeting ("AGM") following their appointment.
Directors are required to seek reappointment every three years.
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.
The powers of the Directors are determined by Cayman Islands company law, the provisions of the Company's Memorandum and Articles and by any directions given by shareholders by way of special resolution.
The Directors have been authorised to allot and issue securities and grant options over or otherwise dispose of shares under Article 3 and the Company is authorised to make purchases of its own shares under Article 8.2 and make payment for the redemption or purchase of its own shares in any manner permitted by the Companies Law (2009 revision) of the Cayman Islands including out of capital.
The statement of Directors' responsibilities for the IFRS financial statements is included on page 76.
The statement of Directors' responsibilities for the MCEV supplementary information is included on page 160.
Following shareholder approval on 15 March 2010, the Company has entered into a deed of indemnity by way of deed poll with its Directors whereby the Company has agreed to indemnify each Director against all losses incurred by them in the exercise, execution or discharge of their powers or duties as a Director of the Company, provided that the indemnity shall not apply to the extent prohibited by any applicable law.
The deed of indemnity remains in force as at the date of signature of this Directors' Report.
The Board has established procedures for handling conflicts of interest in accordance with Cayman Islands company law and the Company's Articles.
On an ongoing basis, Directors are responsible for informing the Company Secretary of any new, actual or potential conflicts that may arise.
All Directors and employees of the Company and its subsidiaries are subject to the Group Conflicts of Interest Policy which has been established to provide a clear framework for an effective system of internal control to manage conflicts of interest throughout the Group.
The Company maintains Directors' & Officers' liability insurance cover which is reviewed annually.
Changes to the Company's Memorandum and Articles require prior shareholder approval and, in some cases, the approval of the Group's lending banks.
The Memorandum and Articles are available on the Company's website, www.thephoenixgroup.com.
Details of the authorised, issued and fully paid share capital as at 31 December 2009 and movements in share capital during the period are presented in note 16 to the IFRS financial statements.
Details about the warrants outstanding over the Company's ordinary and 'B' ordinary shares are presented in note 24 of the IFRS financial statements.
Subject to the provisions set out in Article 7 of the Company's Articles and, where applicable, the rules of the book-entry and settlement system operated by Euroclear Nederland, the Company's shares are transferable.
Under the Dutch Financial Supervision Act, actual or potential interests in five percent or more of the Company's shares in issue are required to be disclosed to the Netherlands Authority for the Financial Markets ("AFM"). Based on information contained in the public register kept by the AFM and other information available to the Company as at 30 March 2010 (the last practicable date prior to the publication of the Annual Report and Accounts), the parties named in the table below have disclosed that they hold actual interests in voting rights over five percent or more of the Company's shares in issue.
| Name | No. of ordinary shares held |
No. of 'B' ordinary shares held |
Aggregate no. of shares held |
Percentage of shares in issue |
|---|---|---|---|---|
| TDR Capital Nominees Limited | – | 17,520,323 | 17,520,323 | 13.24% |
| Xercise Limited | – | 14,108,205 | 14,108,205 | 10.66% |
| M E Franklin | 7,323,720 | 968,599 | 8,292,319 | 6.27% |
| Tarragon Trust | 7,104,640 | 968,599 | 8,073,239 | 6.10% |
| The Royal London Mutual Insurance Society | – | 6,180,000 | 6,180,000 | 4.67% |
(continued)
The Company and its subsidiaries do not follow any code or standard on payment practice, but it is the policy to pay suppliers within 30 days of the invoice date or, if different, in accordance with any terms agreed with suppliers.
The Company and its subsidiaries have not and do not intend to make donations to political parties or independent election candidates nor have they made or intend to make any donations to EU political organisations or incur EU political expenditure.
Details of the charitable contributions of more than £2,000 made by the Company and its subsidiaries during the year are presented in the Corporate Responsibility section on pages 50 to 51.
It is the intention of the Company to hold an AGM each year. The next AGM will be held on Wednesday 23 June 2010. A separate notice convening this meeting will be distributed to shareholders in due course and will include an explanation of the items of business to be considered at the meeting.
Ernst & Young Accountants LLP have indicated their willingness to continue in office as auditors of the Company and a resolution proposing their reappointment will be put to the AGM.
The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware and that each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
Gerald Watson was appointed as Company Secretary of the Company on 2 September 2009.
The Board of Directors
J Moss S Smith
St Helier 30 March 2010
Group Chief Executive Group Finance Director
The Company complied throughout 2009 with Cayman Islands law, Euronext Listing Rules and with regulations applicable to the Company's secondary listing on the London Stock Exchange from 17 November 2009 (the date of that listing).
The Company was not, by virtue of its secondary listing, required during 2009 or to date in 2010, to comply with the June 2008 UK Combined Code on Corporate Governance ("the Combined Code"). However, the Directors support the high standards of corporate governance contained in the Combined Code and, in line with the Company's intention to seek the Premium Listing, this report outlines the Company's position with regard to the Combined Code as at 30 March 2010.
The Board comprises the Non-Executive Chairman, the Group Chief Executive, the Group Finance Director and 11 other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 54 to 57. The Board considers that the following Directors are independent as they do not have any interest or business or other relationship which could, or could reasonably be perceived to, interfere materially with their ability to act in the best interests of the Company: David Barnes, Charles Clarke, Ian Cormack, Tom Cross Brown, Isabel Hudson, Alastair Lyons and David Woods. The Board has considered the criteria proposed by the Combined Code in assessing the independence of the Directors.
Non-Executive Directors are appointed for a term of three years, and any subsequent terms are considered by the Nomination Committee. The remuneration of the Directors is shown in the Remuneration report on pages 68 to 73. The terms and conditions of appointment of Non-Executive Directors are on the Company's website. All Directors will be subject to a vote for re-election at the Company's first Annual General Meeting in June 2010.
All the Directors of the Company are FSA Approved Persons in respect of the Company's FSA-regulated subsidiaries.
The Board is responsible to the shareholders for the overall governance and performance of the Group. The Board's role is to provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board has a schedule of matters reserved for its consideration and approval. These matters include:
The schedule of matters reserved for the Board is available from the Company Secretary. Matters which are not reserved for the Board and also its committees under their terms of reference (which are available on the Group website), or for shareholders in general meetings, are delegated to the Group Chief Executive, Group Finance Director and other senior executives under a schedule of delegated authorities with specific parameters approved by the Board.
Central management and control is in Jersey where the Company's head office is located.
(continued)
There is a division of responsibility, approved by the Board, between the Chairman, Ron Sandler, who is responsible for the leadership and effective operation of the Board and the Group Chief Executive, Jonathan Moss, who is responsible to the Board for the overall management and operation of the Group. The Chairman's other significant commitments are set out in his biographical details on page 54.
The Senior Independent Director, appointed by the Board, is Alastair Lyons. His role is to be available to shareholders whose concerns are not resolved through the normal channels or when such channels are inappropriate. He is also responsible for leading the appraisal of the Chairman's performance by the Non-Executive Directors and for leading the process for appointing a new Chairman, when appropriate.
The Board of the Company changed completely at the start of September 2009 on the Company's acquisition of the Pearl businesses. Additions were made to the Board during the latter part of 2009 and the first quarter of 2010 to establish the Board in its current state. The evaluation of its performance and that of its committees and individual Directors will take place in accordance with the Board's approved evaluation process. This is scheduled to take place in the latter part of 2010 once the new Board has operated as a unit for a reasonable period. The process, approved by the Board, is as follows:
The Chairman will facilitate a discussion on, and evaluation of, the Board's performance. This will include discussions both collectively and individually about:
Led by the Senior Independent Director, the Non-Executive Directors will meet, without the Chairman present, to appraise the Chairman's performance, after taking into account the views of Executive Directors.
A review of a Director's individual performance will be undertaken by the Chairman and the Board as part of the evaluation. This review will aim to show whether the Director in question continues to contribute effectively and to demonstrate commitment to the role (including commitment of time to Board and committee meetings and any other duties). The Chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the Board and, where appropriate, proposing new members to be appointed to the Board or seeking the resignation of Directors.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. To ensure that the Directors continually update their skills and their knowledge of the Company, all Directors receive regular presentations on different aspects of the Company's business and on financial, legal and regulatory issues.
The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year) and emergency Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. The Board is scheduled to meet nine times in 2010 including a two-day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will continue to hold meetings with the Chairman without the Executive Directors being present.
Since the acquisition of the Pearl businesses on 2 September 2009, at which stage the composition of the Board was completely changed, the Board met four times in 2009. Attendance by each of the Directors at those meetings was:
| Date appointed | Number of meetings held in 2009 while a Director |
Number of meetings attended in 2009 while a Director |
|
|---|---|---|---|
| Ron Sandler | 24 September 2009 | 2 | 2 |
| Ian Ashken | 2 September 2009 | 4 | 3 |
| Rene-Pierre Azria | 2 September 2009 | 4 | 4 |
| David Barnes | 2 September 2009 | 4 | 4 |
| Ian Cormack | 2 September 2009 | 4 | 3 |
| Tom Cross Brown | 24 September 2009 | 2 | 1 |
| Manjit Dale | 2 September 2009 | 4 | 4 |
| Jonathan Evans | 2 September 2009 | 2 | 2 |
| Jonathan Moss | 2 September 2009 | 4 | 4 |
| Hugh Osmond | 2 September 2009 | 4 | 3 |
| Simon Smith | 2 September 2009 | 4 | 4 |
The dates of appointment of the remaining current Directors were:
Charles Clarke – 18 February 2010 Isabel Hudson – 18 February 2010 David Woods – 18 February 2010 Alastair Lyons – 29 March 2010
The Board approved, on 3 September 2009, a corporate governance manual which sets a framework within which the Directors and other employees are expected to act to protect the interests of shareholders, customers, employees and suppliers. It includes policies on share trading, market disclosure and conflicts of interest.
All Directors have access to the advice and services of the Company Secretary, who can be appointed or removed only with the approval of the Board. The Board has adopted a procedure whereby Directors may, in the performance of their duties, seek independent professional advice at the Company's expense if considered appropriate.
The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the committees are on the Company's website.
Alastair Lyons is the Chairman of the Audit Committee. The other members are David Barnes and Charles Clarke. The Chairman of the Audit Committee has recent and relevant financial experience. The composition of the Committee is in accordance with the requirements of the Combined Code that the Audit Committee should consist of at least three independent Non-Executive Directors of which at least one has recent and relevant financial experience. The Audit Committee was established on 29 March 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Audit Committee is scheduled to meet five times in 2010.
The Audit Committee is responsible for making recommendations to the Board on such matters as the appointment of the external auditors and their terms of engagement and for reviewing the performance, objectivity and independence of the external auditors. The Audit Committee is also responsible for assessing the effectiveness of the internal audit function. The Audit Committee receives and reviews the Annual Report & Accounts and other related financial disclosures, the ultimate responsibility for these matters remaining with the Board. It monitors the overall integrity of the financial reporting by the Company and its subsidiaries and reviews compliance with legal and regulatory requirements and the effectiveness of the Group's internal controls. The terms of reference of the Audit Committee state that it shall meet the external auditor at least once a year without management being present.
(continued)
The Company has adopted a Charter of Statutory Auditor Independence, which requires both the Company and the external auditors to take measures to safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding non-audit services in respect of specific areas, such as secondments to management positions, or which could create a conflict or perceived conflict. It also includes details of the procedures for the rotation of the external audit engagement partner. The Charter is on the Company's website.
Ron Sandler is the Chairman of the Nomination Committee. The other members are Ian Cormack and Tom Cross Brown. The composition of the Committee is in accordance with the requirements of the Combined Code that the Nomination Committee should consist of a majority of independent Non-Executive Directors and that the Chairman or an independent Non-Executive Director should chair the Committee. The Nomination Committee was established on 1 February 2010 following the appointment of additional independent Non-Executive Directors to the Board.
The Nomination Committee is responsible for considering the size, composition and balance of the Board, and the retirement and appointment of Directors and making recommendations to the Board on these matters. During 2009 and the early part of 2010, the appointment of new Directors was considered by the Board, and in all cases, an external search consultancy was used to identify suitable candidates. The Nomination Committee considers succession planning for Directors and other senior executives.
Ian Cormack is the Chairman of the Remuneration Committee. The other members are David Barnes and Isabel Hudson. The composition of the Committee is in accordance with the requirements of the Combined Code, that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee was established on 18 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Remuneration Committee is scheduled to meet twice in 2010.
The Remuneration Committee is responsible for making recommendations to the Board on the Company's remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Executive Directors and other senior executives in the Group. These include pension rights and executive incentive schemes to encourage superior performance. Details of the remuneration structure are provided in the Directors' Remuneration report on pages 68 to 73.
Hewitt New Bridge Street, the Company's remuneration consultants, provide advice to the Remuneration Committee.
The establishment of a Risk Committee is not a requirement of the Combined Code. However, the Board believes such a Committee is important to ensure the robust management of risk for the Group. The composition of the Committee, with a majority of independent Non-Executive Directors, is in accordance with the final recommendations of the report by Sir David Walker "A review of corporate governance in UK banks and other financial industry entities."
David Woods is the Chairman of the Risk Committee. The other members are Rene-Pierre Azria, Tom Cross Brown, Isabel Hudson and Hugh Osmond. The Risk Committee was established on 26 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Risk Committee is scheduled to meet five times in 2010.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the Board's overall degree of risk aversion, the current financial situation of the Company and, drawing on assessment by the Audit Committee, the Company's capacity to manage and control risks within the agreed strategy. It advises the Board on all high-level risk matters but does not extend into operational matters which are for the executive within the overall risk framework determined by the Board.
The Company places considerable importance on communication with shareholders and engages with them on a wide range of issues. There is a regular dialogue with institutional shareholders through meetings held on a regular basis. The Chairman and Executive Directors are available to meet institutional investors, fund managers and analysts when required. At these meetings a wide range of relevant issues including strategy, performance, management and governance are discussed. Board members regularly receive copies of the latest analysts and brokers reports on the Company and the sector to further develop their knowledge and understanding of external views about the Company.
The Company's investor relations department is dedicated to facilitating communication with institutional investors. The Directors consider it important to understand the views of shareholders and in particular any issues which concern them. The Chairman and the Non-Executive Directors provide feedback to the Board on topics raised with them by major shareholders. Should major shareholders wish to meet the newly appointed Directors, or any of the Directors generally, they are welcome to do so.
The Board regards the AGM as a valuable opportunity to communicate with its shareholders. At the meeting, the Company intends to comply with the Combined Code as it relates to voting including the separating of resolutions. Shareholders are invited to ask questions during the meeting and have an opportunity to meet with the Directors following the conclusion of the formal part of the meeting. In line with the Combined Code details of proxy voting by shareholders are made available at the meeting and are posted on the Company's website following the meeting.
The Company's annual report and accounts, together with the Company's interim report, interim management statements and other public announcements and presentations are designed to present a balanced and understandable view of the Group's activities and prospects and are available on the Company's website.
The Directors have acknowledged their responsibilities in the Statement of Directors' Responsibilities in relation to the IFRS financial statements for the year ended 31 December 2009 (refer to page 76).
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Business and Strategy and Performance sections on pages 10 to 43:
The financial position of the Group, its cash flows and liquidity position are described in the financial statements and notes.
The Board's going concern assessment is included within the Directors' report on page 59.
The Combined Code requires Directors to review and report to shareholders on the effectiveness of the Company's systems of internal controls which include financial, operational and compliance controls and risk management. The Board has overall responsibility for the Group's systems of internal controls and for reviewing their effectiveness. The Group's systems of internal controls are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
The Board (and its subsidiary company Boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. In accordance with the Combined Code, the Board intends to undertake a review of internal controls prior to its approval of next year's Annual Report and Accounts. The Group's approach to risk management is contained on pages 40 to 43.
Additional assurance is provided by the internal audit function, which operates and reports independently of management. The internal audit function provides objective assurance on the policies and processes supporting the internal controls to the Audit and Risk committees.
The Remuneration Committee is responsible for making recommendations to the Board on the Group's remuneration and compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration packages for the Group Chairman, Executive Directors, members of ExCo and other senior managers in the Group.
As the company is incorporated in the Cayman Islands and currently has a Standard Listing on the Official List, the Company is not required to provide information contained in this Remuneration report in accordance with the UK Companies Act 2006. However, in line with its intention to seek a Premium Listing and the enhanced level of disclosure that will entail, the Company has sought to comply with these provisions voluntarily.
The Board Remuneration Committee was formed in February 2010 following the appointment of additional independent Non-Executive Directors to the Board. The Chairman of the Remuneration Committee is Ian Cormack. The other members of the Committee are David Barnes and Isabel Hudson. The Group Chairman, Group Chief Executive and Group Human Resources Director are invited to attend meetings but are not present when their own remuneration is discussed.
Prior to the establishment of the Remuneration Committee, and following the acquisition of the Pearl businesses on 2 September 2009, remuneration recommendations were presented to the Board of Phoenix Group Holdings. Advice was provided during 2009 by Hewitt New Bridge Street ("HNBS") and they continue to advise the Remuneration Committee. HNBS provided no other services to the Group during the year and their terms of engagement are available from the Company Secretary. The Company Secretary acted as secretary to the Remuneration Committee.
The success of the Group is dependent, amongst other things, upon the ability to attract, motivate and retain highly-skilled management and other specialist personnel. Competition for such individuals in the life insurance and asset management sectors remains significant and is anticipated to remain so for the foreseeable future.
Following a recent review of remuneration arrangements, the Remuneration Committee concluded that a remuneration policy consistent with UK listed comparators should be adopted whereby:
In light of the above policy, and following a detailed benchmarking exercise, Executive Directors' base salaries have been increased with effect from 1 January 2010, and maximum (and target) bonus potential has been reduced for 2010, so that these elements of the package, and the structure of packages more generally, better reflect the market.
The Remuneration Committee has also considered the implications for the Group of the recommendations of the FSA Code of Practice on Remuneration Policies, published in August 2009 and the Walker Review of Corporate Governance of UK Banking Industry, published in November 2009 and have incorporated relevant recommendations where appropriate.
The Committee reviews base salaries for Executive Directors (and senior executives) annually, having regard to:
An annual bonus scheme is operated for all employees including executives and senior managers, (other than for Ignis Asset Management). Payment of annual bonuses is dependent upon performance against embedded value, internal cost control and risk management targets, together with business-aligned challenging personal targets. Within Ignis Asset Management, separate annual bonus arrangements are in place, which are subject to review and approval by the Remuneration Committee.
Long-term incentives are provided through the Long-Term Incentive Plan ("LTIP") which is designed to ensure that Executive Directors and other senior executives focus effort on those performance measures of greatest relevance to the Group and are appropriately retained. Participants receive awards of conditional shares in the Group which normally vest three years after they are awarded, subject to the satisfaction of performance conditions and continued service. The Group operates a separate LTIP for senior executives within Ignis Asset Management which focuses on growth in the value of the asset management business.
The Group also introduced and operated the Bonus Share Plan ("BSP") during 2009 which was designed to reward Executive Directors and senior executives for their efforts and performance with respect to the capital reorganisation in the second half of the year. There is no intention to grant further BSP awards given that the LTIP will be the primary long-term incentive vehicle going forward.
Pension benefits are provided to all employees, including the Executive Directors, via defined contribution or defined benefit pension schemes, with the latter now closed to new entrants. Annual bonuses and long-term incentives are non-pensionable, save for a pensionable bonus element in the Pearl Group Staff Pension Scheme, for which only members of the Money Purchase (and hybrid) sections of the scheme are eligible.
The Group is keen to align employee and wider owner interests through share ownership. All UK-based staff, including Executive Directors, employed on 30 November 2009, became eligible under defined criteria for grants of options to acquire shares under the Phoenix Group Holdings 2010 Sharesave Scheme (the "Scheme"). The Scheme provides for the grant of options to subscribe for Group shares at the end of either three or five years, using the proceeds from a savings contract entered into at the time the option was granted. Options under the Scheme have been granted with a 15 percent discount to the market price at the time of the grant. As at 19 March 2010, 834 participants held options over 1,159,069 shares under the Scheme.
Determination of the remuneration of Non-Executive Directors remains a matter for the whole Board (with the Non-Executive Directors absenting themselves) in accordance with the Articles. The only exception to this is the setting of the expense claim policy which is delegated to the Remuneration Committee to consider.
Non-Executive Directors do not have service agreements with the Group, but are engaged under a formal letter of appointment setting out the Group's expectations of them, including the amount of time they are required to spend on Group business. Appointment is for a fixed term of three years, terminable with one months' notice on either side. Any subsequent terms are considered by the Group's Nomination Committee. Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision.
On 2 September 2009, Jonathan Moss, Group Chief Executive and Simon Smith, Group Finance Director were both appointed to the Board of Directors. There are no other Executive Directors. Jonathan Moss has a service agreement dated 5 February 2010 and Simon Smith has a service agreement dated 30 March 2005.
(continued)
At the beginning of 2009, the Board of the former Pearl Group Limited determined that base salaries should not be increased for Executive Directors.
With effect from 1 January 2010, the Remuneration Committee approved increases in the base annual salaries of the Group Chief Executive to £650,000 (from £400,000) and for the Group Finance Director to £400,000 (from £380,000). These increases follow a review of remuneration arrangements which included a detailed assessment of base salary levels in the life assurance sector and listed environment more generally and have been accompanied by a reduction in the value of bonus potential to better align packages to market levels following the adoption of a market consistent remuneration policy.
The Executive Directors' remuneration includes a non-pensionable car allowance which is paid monthly. Non-pensionable benefits-in-kind also include private medical insurance, income protection and life assurance.
For 2009, bonus potential for the Executive Directors under the Group annual bonus scheme was as follows:
| Target* (% of salary) |
Maximum (% of salary) |
|
|---|---|---|
| Jonathan Moss | 100 | 200 |
| Simon Smith | 85 | 170 |
* Assumes "on target" financial and personal performance
For the purposes of assessing the corporate element of performance, the following targets apply:
The business performance targets and relative weightings were recommended by ExCo to the Board and applied to all employees, including the Executive Directors and the remaining members of ExCo. A corporate "multiplier" of 1.02 percent was then calculated, reflecting actual Group performance in 2009 against each of the targets (with 1.0 reflecting an overall "on target" performance and 2.0 being the maximum multiplier which can be applied where the "stretch" target is exceeded in each of the three measures). Actual bonus amounts were finally determined by a combination of the "multiplier" and personal performance ratings.
In addition to the above, the Remuneration Committee of the former Pearl Group Limited awarded bonuses to the Group Chief Executive and the Group Finance Director following the successful achievement of a wide range of strategic and operational activities. Details of these payments, together with those determined by the combination of the "multiplier" and personal performance ratings referred to above, are set out in the emoluments table on page 73.
For 2010, bonus potential for the Executive Directors will be as follows:
| Target* | Maximum | |
|---|---|---|
| Jonathan Moss | (% of salary) 75 |
(% of salary) 150 |
| Simon Smith | 75 | 150 |
* Assumes "on target" financial and personal performance
The same performance measures and relative weighting as between those measures will be applied in 2010 as were applied in 2009, with actual targets reflecting achievement of the 2010 Group plans.
During 2009, 'B' ordinary shares were allocated to an employee benefit trust in relation to the LTIP and BSP and recommendations were made to the trustee in respect of the shares allocated. The Executive Directors are potential beneficiaries of the employee benefit trust and the terms of the recommendation requests the trustees to consider allocating the following number of 'B' ordinary shares to them or their family trusts:
| 'B' ordinary shares | 'B' ordinary shares | |
|---|---|---|
| subject of the | subject of the | |
| recommendation under the LTIP |
recommendation under the BSP |
|
| Jonathan Moss | 112,500 | 112,500 |
| Simon Smith | 100,000 | 100,000 |
1 Both the LTIP and BSP awards were granted on 21 September 2009
2 LTIP awards will automatically vest after three years and once the Premium Listing on the LSE has been attained
3 The BSP awards have no performance conditions attached and have a vesting period, as detailed within the Rules of the Scheme, of two years from grant
4 Both the LTIP and BSP awards are considered as conditional share awards
Neither of the Executive Directors or their respective family trusts has any entitlement to or interest in the shares unless or until the trustee exercises its discretion to allocate the shares to them.
In respect of LTIP awards to be granted in 2010, it is envisaged that the Executive Directors will each receive an award over shares worth 200 percent of salary with performance targets based predominantly on Group MCEV, being the performance metric considered by the Remuneration Committee to be the most appropriate measure of long-term Group performance with which to reward senior executives. The actual performance target(s) have yet to be finalised but will be appropriately challenging and disclosed in next year's Remuneration report.
On 22 January 2010, the Group Chief Executive and Group Finance Director were granted 1,611 and 2,761 options over shares under the Phoenix Group Holdings 2010 Sharesave Scheme. These options were granted at an exercise price of £5.63 and are exercisable from 1 March 2013 and 1 March 2015, respectively.
On 31 December 2009, the middle market price of Phoenix Group Holdings ordinary shares was £6.64 per share (€7.44 – Euronext), having varied from 17 November (when the Company obtained a Standard Listing on the Official List) to 31 December 2009, between a low of £6.60 and a high of £7.92.
The equivalent information for the year from 1 January to 31 December 2009, as traded on Euronext Amsterdam, was a low of €7.30 and a high of €10.03.
Jonathan Moss is a member of the Money Purchase Section (defined contribution) of the Pearl Group Staff Pension Scheme and receives a Group contribution of 11.7 percent of salary up to a maximum earnings limit (currently £123,600). For the period from 2 September 2009 until 31 December 2009, £4,820 was paid into his money purchase account.
Simon Smith is a member of the Pearl Final Salary Section (defined benefit) of the Pearl Group Staff Pension Scheme. His pension entitlement accrues at 1/60th for each year of service, with a maximum pension entitlement of 2/3rds pensionable salary at the age of 60. No contributions were paid or are payable by Simon Smith under the terms of the Scheme. The increase in his pension entitlement for the period from 2 September 2009 until 31 December 2009 was as follows:
| Final salary | Final salary | Transfer | Transfer | ||
|---|---|---|---|---|---|
| pension | Increase in | pension | value | Increase in | value |
| as at | final salary | as at | as at | transfer value | as at |
| 2 September | pension for | 31 December | 2 September | for the | 31 December |
| 2009 | the period | 2009 | 2009 | period | 2009 |
| £22,488 | £687 | £23,175 | £318,275 | £10,242 | £328,517 |
Executive Directors are not permitted to accept any other non-Group engagement or office (other than at the request of the Group) without the prior approval of the Board. At present there are no external appointments held by any of the Executive Directors, other than when they are representing the Group.
In view of Phoenix Group Holdings acquiring the Pearl businesses during September, the Directors do not believe the provision of TSR information is meaningful this year. The Group intends to include a graph showing TSR against an appropriate broad equity index in future Annual Report & Accounts.
(continued)
The interests of the Directors (including family interests) in Phoenix Group Holdings ordinary shares1 both during the year ending 31 December 2009 and up to 30 March 2010, were as follows:
| As at 1 January 2009 | As at 31 December 2009 and 30 March 2010 or date of |
|
|---|---|---|
| or date of appointment if later | leaving if earlier | |
| Ian Ashken8 | ||
| (appointed 2 September 2009) | – | – |
| René-Pierre Azria | ||
| (appointed 2 September 2009) | – | 16,391 |
| David Barnes | ||
| (appointed 2 September 2009) | – | – |
| Nicolas Berggruen7 | ||
| (resigned 2 September 2009) | 7,404,6002 | 9,954,6413 |
| Ian Cormack | ||
| (appointed 2 September 2009) | – | – |
| Tom Cross Brown | ||
| (appointed 24 September 2009) | – | – |
| Manjit Dale4 | ||
| (appointed 2 September 2009) | – | – |
| Jonathan Evans | ||
| (appointed 2 September 2009, resigned 22 October 2009) | – | – |
| Martin Franklin7 | ||
| (resigned 2 September 2009) | 7,404,600 | 9,954,6413 |
| Dimitri Goulandris7 | ||
| (resigned 2 September 2009) | 63,600 | 66,667 |
| Jonathan Moss | ||
| (appointed 2 September 2009) | 33,989* | 33,989* |
| Miguel Paes do Amaral7 | ||
| (resigned 2 September 2009) | 63,600 | 66,667 |
| Ron Sandler5 | ||
| (appointed 24 September 2009) | – | – |
| Simon Smith | ||
| (appointed 2 September 2009) | 32,200* | 32,200* |
| Hugh Osmond | ||
| (appointed 2 September 2009) | 703,616* | 717,1666 * |
| Ashley Silverton | ||
| (resigned 2 September 2009) | – | – |
1 Disclosures presented above primarily represent Phoenix Group Holdings ordinary shares, except for holdings of 'B' ordinary shares which are marked*. Any warrant holdings are disclosed within the respective footnote.
2 Represents securities held indirectly by Nicolas Berggruen through Berggruen Acquisitions Holdings II Ltd. Nicolas Berggruen did not hold any securities of Phoenix Group Holdings directly.
3 Consists of 7,954,641 ordinary shares and 2,000,000 Sponsors' Warrants that became exercisable upon consummation of the acquisition of the Pearl businesses on 2 September 2009.
4 TDR Capital Nominees Limited is a wholly-owned subsidiary of TDR Capital LLP, of which Manjit Dale is a founding partner. Details of TDR Capital's interests can be found within the Directors' report. In addition, TDR Capital has contingent rights in respect of a further 10,871,095 shares.
5 As announced previously, Ron Sandler is entitled, under his letter of appointment, to an award of 300,000 Phoenix Group Holdings 'B' ordinary shares. In line with this agreement, Ron Sandler will receive 177,000 shares (i.e. the net of tax value, with the Group settling the relevant taxes) prior to the Premium Listing.
6 Hugh Osmond is a beneficial shareholder of Xercise Limited. Xercise Limited has contingent rights in respect of a further 9,180,660 shares. Details of Xercise Limited's interests can be found within the Directors Report.
7 On the consummation of the acquisition on 2 September 2009, 50 percent of all warrants held by warrant holders were mandatorily redeemed. As a result, 31,800 warrants each held by Miguel Pais do Amaral and Dimitri Goulandris were redeemed in exchange for 3,067 newly issued ordinary shares each. Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC (in which Nicolas Berggruen and Martin Franklin have each respectively been considered to have a beneficial interest) redeemed a total of 5,702,300 warrants each (2,000,000 sponsor warrants and 3,702,300 founder warrants), in exchange for 550,040 ordinary shares each. The exchange ratio equated to one ordinary share for each 10.36705 warrants redeemed. As at 2 September 2009, the share price of Phoenix Group Holdings was €9.28.
8 Ian Ashken does not hold any shares in Phoenix Group Holdings directly although he is a member of Marlin Equities IV, LLC. M E Franklin disclosed a significant interest in the Company through Marlin Equities IV, LLC details of which can be found within the Directors' report.
The emoluments of the Directors were as follows:
| Fees/salary | Benefits10 | Annual | Bonus | 2009 Total | |
|---|---|---|---|---|---|
| £ | £ | bonus£ | £ | £ | |
| Ron Sandler | |||||
| (appointed 24 September 2009) Jonathan Moss |
121,154 | – | – | 121,154 | |
| (appointed 2 September 2009) | 131,818 | 3,625 | 202,88211 | 433,33312 | 771,658 |
| Simon Smith12 | |||||
| (appointed 2 September 2009) | 125,227 | 4,933 | 162,47311 | 350,00012 | 642,633 |
| Ian Ashken | |||||
| (appointed 2 September 2009) | 33,333 | – | – | 33,333 | |
| René-Pierre Azria | |||||
| (appointed 2 September 2009) | 33,333 | – | – | 33,333 | |
| David Barnes | |||||
| (appointed 2 September 2009) | 36,66716 | – | – | 36,667 | |
| Nicolas Berggruen | |||||
| (resigned 2 September 2009) | – | – | – | – | |
| Ian Cormack | |||||
| (appointed 2 September 2009) | 62,71016 | – | – | 62,710 | |
| Tom Cross Brown | |||||
| (appointed 24 September 2009) | 62,59916 | – | – | 62,599 | |
| Manjit Dale | |||||
| (appointed 2 September 2009) | 5,38513 | – | – | 5,385 | |
| Jonathan Evans | |||||
| (appointed 2 September 2009, | |||||
| resigned 22 October 2009) | 24,38016 | – | – | 24,380 | |
| Martin Franklin | |||||
| (resigned 2 September 2009) | – | – | – | – | |
| Dimitri Goulandris | |||||
| (resigned 2 September 2009) | – | – | – | – | |
| Hugh Osmond | |||||
| (appointed 2 September 2009) | 5,38514 | – | – | 5,385 | |
| Miguel Paes do Amaral | |||||
| (resigned 2 September 2009) | – | – | – | – | |
| Ashley Silverton | |||||
| (resigned 2 September 2009) | 571,77515 | – | – | 571,775 |
9 Remuneration shown is only for the period that the Director was in office.
10Benefits include car allowance, private medical insurance, income protection and life assurance, as applicable.
11Relates to payments made in respect of the multiplier and personal performance ratings as part of the 2009 Annual bonus scheme.
12Relates to additional payments awarded for the successful achievement of a wide range of strategic and operational activities, as referred to on page 70, contingent upon the Directors remaining in service until the date the payments were made. These cash payments were made on 22 March 2010.
13 For the period from 2 September to 12 December 2009, TDR Capital were paid fees as disclosed under the "Related Party transaction" note.
14 For the period from 2 September to 12 December 2009, Hugh Osmond received under a Transitional Services Agreement, fees of £121,401.
15As set out in the Proxy Statement issued to shareholders in July 2009, Mr Silverton received £8,851 in fees and in addition, received £562,924 as a result of the consummation of the acquisition of the Pearl businesses on 2 September 2009.
16 Fees to these Non-Executive Directors include amounts due to them for service on the Boards of subsidiary companies.
During 2008, with regard to Phoenix Group Holdings, none of the Directors received any remuneration.
Signed on behalf of the Board of Directors by the Chairman of the Remuneration Committee
Ian Cormack 30 March 2010
Despite the market volatility of the past 18 months, the Group produced a resilient performance in 2009
Board Responsibility Statement according to Section 5:25c(2)(c) of the Dutch Financial Markets Supervision Act.
The Board of Directors of Phoenix Group Holdings hereby declares that, to the best of its knowledge:
Jonathan Moss Simon Smith
Group Chief Executive Group Finance Director
St Helier 30 March 2010
We have audited the accompanying consolidated financial statements 2009 which are part of the financial statements of Phoenix Group Holdings, Cayman Islands, which comprise the statement of consolidated financial position as at 31 December 2009, the consolidated income statement, the statement of consolidated comprehensive income, the analysis of pro forma profit reconciliation of Group operating profit to profit before the tax attributable to owners, the statement of consolidated cash flows and the statement of consolidated changes in equity for the year then ended and a summary of significant accounting policies and other explanatory notes.
The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the Directors' report in accordance with Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements give a true and fair view of the financial position of Phoenix Group Holdings as at 31 December 2009, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code.
Pursuant to the legal requirement under 2:393 sub 5 part f of the Netherlands Civil Code, we report, to the extent of our competence, that the Directors' report is consistent with the consolidated financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
The Hague, 30 March 2010 Ernst & Young Accountants LLP was signed by S.B. Spiessens
for the year ended 31 December 2009
| Restated | |||
|---|---|---|---|
| 2009 | Period ended 31 December 2008 |
||
| Notes | £m | £m | |
| Gross premiums written | 545 | – | |
| Less: premiums ceded to reinsurers | (31) | – | |
| Net premiums written | 514 | – | |
| Fees | 6 | 101 | – |
| Net investment income | 7 | 1,032 | 33 |
| Total revenue, net of reinsurance payable | 1,647 | 33 | |
| Other operating income | 8 | 67 | – |
| Net income | 1,714 | – | |
| Policyholder claims | (2,043) | – | |
| Less: reinsurance recoveries | 105 | – | |
| Change in insurance contract liabilities | 1,137 | – | |
| Change in reinsurers' share of insurance contract liabilities | 142 | – | |
| Transfer to unallocated surplus | 21 | (175) | – |
| Net policyholder claims and benefits incurred | (834) | – | |
| Change in investment contract liabilities | (429) | – | |
| Acquisition costs | 9 | (8) | – |
| Change in present value of future profits | 33 | 4 | – |
| Amortisation of acquired in-force business | 33 | (50) | – |
| Amortisation of other intangible assets | 33 | (7) | – |
| Administrative expenses | 10 | (255) | (2) |
| Net expense attributable to unitholders | 43 | – | |
| Total operating expenses | (1,536) | (2) | |
| Profit before finance costs and tax | 178 | 31 | |
| Finance costs | 12 | (87) | – |
| Profit for the year before tax | 91 | 31 | |
| Tax attributable to policyholders' returns | 13 | 60 | – |
| Profit before the tax attributable to owners | 151 | 31 | |
| Tax credit | 13 | 44 | – |
| Less: tax attributable to policyholders' returns | 13 | (60) | – |
| Tax attributable to owners | 13 | (16) | – |
| Profit for the year attributable to owners | 135 | 31 | |
| Attributable to: | |||
| Owners of the parent | 95 | 31 | |
| Non-controlling interests | 19 | 40 | – |
| 135 | 31 | ||
| Earnings per ordinary share | |||
| Basic earnings per ordinary share | 15 | 102.9p | 58.1p |
| Diluted earnings per ordinary share | 15 | 89.8p | 45.1p |
The consolidated income statement for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four-month post-acquisition period only.
for the year ended 31 December 2009
| Restated | |||
|---|---|---|---|
| Notes | 2009 £m |
Period ended 31 December 2008 £m |
|
| Profit for the year | 135 | 31 | |
| Other comprehensive income: | |||
| Actuarial gains of defined benefit pension schemes | 105 | – | |
| Exchange differences on translating foreign operations | (40) | 133 | |
| 65 | 133 | ||
| Tax charge | 13 | (31) | – |
| 34 | 133 | ||
| Total comprehensive income for the year | 169 | 164 | |
| Attributable to: | |||
| Owners of the parent | 129 | 164 | |
| Non-controlling interests | 40 | – | |
| 169 | 164 |
The statement of consolidated comprehensive income for the year ended 31 December 2009 incorporates the results of the acquired Pearl businesses for the four-month post-acquisition period only.
for the year ended 31 December 2009
| Restated | |||
|---|---|---|---|
| 2009 | Period ended 31 December 2008 |
||
| Notes | £m | £m | |
| Operating profit | |||
| Phoenix Life | 285 | – | |
| Ignis Asset Management | 14 | – | |
| 299 | – | ||
| Corporate costs | (17) | (2) | |
| Total operating profit/(loss) before adjusting items | 4.2 | 282 | (2) |
| Investment return variances and economic assumption changes on | |||
| long-term business | 5 | 145 | – |
| Variance on owners' funds | 5 | (70) | 33 |
| Amortisation of acquired in-force business | (45) | – | |
| Amortisation of other intangible assets | (7) | – | |
| Non-recurring items | 4.2 | (105) | – |
| Profit before finance costs attributable to owners | 200 | 31 | |
| Finance costs attributable to owners | (49) | – | |
| Profit before the tax attributable to owners | 151 | 31 | |
| Tax attributable to owners | 13 | (16) | – |
| Profit for the year attributable to owners | 135 | 31 |
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.
as at 31 December 2009
| 2009 | Restated 2008 |
||
|---|---|---|---|
| Notes | £m | £m | |
| EQUITY AND LIABILITIES | |||
| Equity attributable to owners of the parent | |||
| Share capital | 16 | – | – |
| Share premium | 859 | 401 | |
| Other reserves | 257 | 6 | |
| Shares held by employee trust | 17 | (4) | – |
| Foreign currency translation reserve | 93 | 133 | |
| Retained earnings | 207 | 33 | |
| Total equity attributable to owners of the parent | 1,412 | 573 | |
| Non-controlling interests | 19 | 728 | – |
| Total equity | 2,140 | 573 | |
| Liabilities | |||
| Pension scheme deficit | 32 | 125 | – |
| Insurance contract liabilities | |||
| Liabilities under insurance contracts | 20 | 50,291 | – |
| Unallocated surplus | 21 | 721 | – |
| 51,012 | – | ||
| Financial liabilities | |||
| Investment contracts | 8,570 | – | |
| Borrowings | 22 | 4,181 | – |
| Deposits received from reinsurers | 23 | 431 | – |
| Derivatives | 24 | 2,842 | 11 |
| Net asset value attributable to unitholders | 946 | – | |
| Obligations for repayment of collateral received | 25 | 4,106 | – |
| 26 | 21,076 | 11 | |
| Provisions | 27 | 101 | – |
| Deferred tax | 28 | 776 | – |
| Reinsurance payables | 17 | – | |
| Payables related to direct insurance contracts | 29 | 759 | – |
| Current tax | 28 | 103 | – |
| Accruals and deferred income | 30 | 177 | 9 |
| Other payables | 31 | 650 | – |
| Total liabilities | 74,796 | 20 | |
| Total equity and liabilities | 76,936 | 593 | |
| IFRS financial | ||
|---|---|---|
| statements |
Notes
2009 £m
| ł ۰, |
|
|---|---|
Restated 2008 £m
| ASSETS | |||
|---|---|---|---|
| Intangible assets | |||
| Goodwill | 77 | – | |
| Acquired in-force business | 2,163 | – | |
| Customer relationships | 438 | – | |
| Present value of future profits | 35 | – | |
| 33 | 2,713 | – | |
| Property, plant and equipment | 34 | 34 | – |
| Investment property | 35 | 1,915 | – |
| Financial assets | |||
| Loans and receivables | 1,081 | – | |
| Derivatives | 24 | 3,540 | – |
| Equities | 13,151 | – | |
| Fixed and variable rate income securities | 37,658 | – | |
| Collective investment schemes | 6,094 | – | |
| 36 | 61,524 | – | |
| Deferred tax assets | 28 | 81 | – |
| Insurance assets | |||
| Reinsurers' share of insurance contract liabilities | 20 | 2,860 | – |
| Reinsurance receivables | 264 | – | |
| Insurance contract receivables | 17 | – | |
| 3,141 | – | ||
| Current tax | 28 | 44 | – |
| Prepayments and accrued income | 622 | – | |
| Other receivables | 38 | 781 | – |
| Cash and cash equivalents | 39 | 6,081 | 2 |
Amounts in trust 40 – 591
Total assets 76,936 593
for the year ended 31 December 2009
| Restated Period ended |
|||
|---|---|---|---|
| Notes | 2009 £m |
31 December 2008 £m |
|
| Cash flows from operating activities | |||
| Cash absorbed by operations | 40 | (357) | – |
| Taxation received | 37 | – | |
| Net cash flows from operating activities | (320) | – | |
| Cash flows from investing activities | |||
| On acquisition of the Pearl businesses | 40 | 6,146 | – |
| Interest received | 2 | 16 | |
| Net change in cash invested in trust account | 591 | (457) | |
| Net cash flows from investing activities | 6,739 | (441) | |
| Cash flows from financing activities | |||
| Gross proceeds from issue of share capital | – | 422 | |
| Repayment on redemption of shares | (41) | – | |
| Proceeds from issue of warrants | – | 31 | |
| Cost of issuing shares and warrants | – | (15) | |
| Repurchase of shares from non-controlling interests | (3) | – | |
| Interest paid on borrowings | (221) | – | |
| Proceeds of new borrowings | 42 | – | |
| Dividends paid to non-controlling interests | (8) | – | |
| Repayment of borrowings | (110) | – | |
| Net cash flows from financing activities | (341) | 438 | |
| Net increase/(decrease) in cash and cash equivalents | 6,078 | (3) | |
| Cash and cash equivalents at the beginning of the year | 2 | – | |
| Effect of exchange rate changes on cash and cash equivalents | 1 | 5 | |
| Cash and cash equivalents at the end of the year | 39 | 6,081 | 2 |
The statement of consolidated cash flows for the year ended 31 December 2009 incorporates the cash flows of the acquired Pearl businesses for the four-month post-acquisition period only.
for the year ended 31 December 2009
| Shares held by |
Foreign | Non | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Share | employee | currency | controlling | ||||||
| capital (note 16) |
Share premium |
Other reserves |
trust (note 17) |
translation reserve |
Retained earnings |
Total | interests (note 19) |
Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2009 – as restated | – | 401 | 6 | – | 133 | 33 | 573 | – | 573 |
| On acquisition of the Pearl businesses | – | – | – | – | – | – | – | 699 | 699 |
| Profit for the year | – | – | – | – | – | 95 | 95 | 40 | 135 |
| Other comprehensive income for the year | – | – | – | – | (40) | 74 | 34 | – | 34 |
| Total comprehensive income for the year | – | – | – | – | (40) | 169 | 129 | 40 | 169 |
| Dividends paid to non-controlling interests | – | – | – | – | – | – | – | (8) | (8) |
| Issue of share capital | – | 440 | – | – | – | – | 440 | – | 440 |
| Issue of share capital into employee trust |
– | 4 | – | (4) | – | – | – | – | – |
| Redemption of shares | – | (41) | – | – | – | – | (41) | – | (41) |
| Contingent rights over shares: Shares to be issued |
– | – | 255 | – | – | – | 255 | – | 255 |
| Credit to equity for equity-settled share-based payment |
– | – | – | – | – | 5 | 5 | – | 5 |
| Conversion of warrants into ordinary shares |
– | 55 | (4) | – | – | – | 51 | – | 51 |
| Repurchase of shares from non-controlling | |||||||||
| interests | – | – | – | – | – | – | – | (3) | (3) |
| At 31 December 2009 | – | 859 | 257 | (4) | 93 | 207 | 1,412 | 728 | 2,140 |
for the period ended 31 December 2008
| Share | Shares held by employee |
Foreign currency |
Non controlling |
||||||
|---|---|---|---|---|---|---|---|---|---|
| capital (note 16) £m |
Share premium £m |
Other reserves £m |
trust (note 17) £m |
translation reserve £m |
Retained earnings £m |
£m | interests (note 19) £m |
Total £m |
|
| At 2 January 2008 | – | – | – | – | – | – | – | – | – |
| Profit for the period | – | – | – | – | – | 31 | 31 | – | 31 |
| Other comprehensive income | |||||||||
| for the period | – | – | – | – | 133 | – | 133 | – | 133 |
| Total comprehensive income for the period | – | – | – | – | 133 | 31 | 164 | – | 164 |
| Issue of share capital | – | 422 | – | – | – | – | 422 | – | 422 |
| Capital contribution of Sponsors' warrants | – | – | 6 | – | – | – | 6 | – | 6 |
| Underwriting fee charged to equity | – | (20) | – | – | – | – | (20) | – | (20) |
| Expenses relating to issuing of shares | |||||||||
| charged to equity | – | (1) | – | – | – | – | (1) | – | (1) |
| Credit to equity for equity-settled | |||||||||
| share-based payment | – | – | – | – | – | 2 | 2 | – | 2 |
| At 31 December 2008 | – | 401 | 6 | – | 133 | 33 | 573 | – | 573 |
(a) Basis of preparation The consolidated financial statements for the year ended 31 December 2009 comprise the financial statements of Phoenix Group Holdings ("the Company") and its subsidiaries (together referred to as "the Group"). Following the completion of the acquisition of the Pearl businesses on 2 September 2009, Liberty Acquisition Holdings (International) Company changed its name to Pearl Group. Subsequently, on 15 March 2010, Pearl Group changed its name to Phoenix Group Holdings.
The consolidated financial statements have been prepared on a historical cost basis except for investment property, owner-occupied property, and those financial assets and financial liabilities that have been measured at fair value.
The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and also in accordance with the statutory provision of Part 9, Book 2, of the Netherlands Civil Code.
The financial statements are presented in sterling (£) rounded to the nearest £ million except where otherwise stated.
The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement more than 12 months after the period end is presented in the notes.
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the consolidated income statement unless required or permitted by an accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group.
The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings including collective investment schemes where the Group exercises overall control. Certain of the collective investment schemes have non-coterminous period ends and are consolidated on the basis of additional financial statements prepared to the period end. The non-controlling interest in the collective investment schemes is classified as a liability and shown in the statement of consolidated financial position as net asset value attributable to unitholders. Intragroup balances and income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements.
Subsidiary undertakings are consolidated from the date that effective control is obtained by the Group and are excluded from consolidation from the date they cease to be subsidiary undertakings.
The Group uses the purchase method to account for the acquisition of subsidiary undertakings. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. Any excess of the fair value of the net assets acquired over the cost of acquisition is credited to the consolidated income statement. Directly attributable acquisition costs are included within the cost of the acquisition, with the exception of costs directly related to the issuing of debt or equity securities which are included within the initial carrying amount of debt or equity securities where these are not carried at fair value.
Non-controlling interests are stated at the initial amount attributed adjusted for the relevant share of subsequent changes in equity.
Following a review of the agreements in relation to the Company's Initial Public Offering ("IPO") and Founders' warrants the comparative amounts for 2008 have been restated to classify the warrants as financial liabilities instead of equity instruments. As a result of this restatement retained earnings have increased by £17 million, the foreign currency translation reserve has decreased by £4 million, share premium has decreased by £24 million and derivative financial liabilities have increased by £11 million.
In 2008, 29.99% of the IPO shares were classified by the Company as a financial liability, 'ordinary shares subject to possible redemption' as it was considered that Phoenix Group Holdings had an obligation to give the holders of the redeemable shares cash in exchange for their shares had they not wished to be involved in the consummation of an acquisition that Phoenix Group Holdings was proposing. It is considered that this obligation could have been avoided and therefore the 29.99% of the IPO shares have been reclassified as equity. This restatement has had the effect of increasing share premium by £132 million, increasing retained earnings by £3 million, increasing the foreign currency translation reserve by £41 million, decreasing ordinary shares subject to possible redemption by £172 million and decreasing deferred interest income on shares subject to possible redemption by £4 million.
In 2008, all share premium arising on the issue of share capital and all share issue costs taken to equity were accounted for within other reserves. The comparative amounts for 2008 have been restated to present these figures within a separate share premium account. The effect of this restatement is to increase share premium and decrease other reserves by £401 million.
On 2 September 2009 the Company changed its functional currency from euros to sterling as from this date, and as a result of the acquisition of the Pearl businesses, the Company primarily generates and expends cash in sterling. All foreign currency transactions for the Company are now translated into the functional currency using the average rate. Details of the accounting policy with respect to foreign currency transactions are given in note 1(c).
The presentational currency of the Group has also been changed from euros to sterling as a result of the acquisition of the Pearl businesses which are predominately based in the UK and transact this business in sterling. The comparative amounts for 2008 have accordingly been restated. This change in accounting policy has resulted in the initial recognition of a foreign currency translation reserve in other comprehensive income for the period ended 31 December 2008 of £133 million and a subsequent reduction in the reserve in the year ended 31 December 2009 of £43 million. This change in accounting policy does not affect earnings and therefore there is no effect on the earnings per share calculation.
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group's business that typically require such estimates are insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, impairment tests for intangible assets, income taxes and pension benefit assets and liabilities.
Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 42.
(continued)
The fair values of financial assets and liabilities are classified and accounted for as set out in accounting policies (r) and (g) respectively. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities, without any deduction for transaction costs. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.
Intangible assets are subject to regular impairment reviews as detailed in accounting policy (n). Impairments are measured at the difference between the carrying value of a particular asset and its recoverable amount. Impairments are recognised in the consolidated income statement in the period in which they occur.
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. The UK taxation regime applies separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets. Any judgements made, and uncertainties considered, in arriving at deferred tax balances in the financial statements are discussed in note 28.
The accounting policy for income taxes (both current and deferred taxes) is discussed in more detail in accounting policy (l).
The valuation of pension benefit assets and liabilities is determined using actuarial valuations, which involves making assumptions about discount rates, expected return rates on assets, future salary increases, mortality rates and future pension increases. As defined benefit pension plans are long term in nature, such assumptions are subject to significant uncertainty. Details of the key assumptions used are shown in note 32.
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in sterling, which is the Group's presentation currency.
The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
Foreign currency transactions are translated into the functional currency of the transacting Group entity using average exchange rates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
Translation differences on debt securities and other monetary financial assets measured at fair value through profit or loss are included in foreign exchange gains and losses. Translation differences on non-monetary items at fair value through profit or loss are reported as part of the fair value gain or loss.
Contracts under which the Group accepts significant insurance risk are classified as insurance contracts.
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.
Some insurance and investment contracts contain a discretionary participation feature ("DPF"). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.
Under current IFRS requirements, insurance contracts and investment contracts with DPF are measured using accounting policies consistent with those adopted under UK GAAP. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
The insurance contract liability for non participating non linked business is calculated initially to comply with the requirements of the Prudential Sourcebook for Insurers issued by the Financial Services Authority ("FSA"), the UK Regulator. The liability for insurance contracts for business in the non profit fund is adjusted where necessary by removing excessively prudent margins required for statutory solvency purposes together with general contingency reserves and those reserves required only under the Prudential Sourcebook for Insurers.
Insurance contract liabilities for non participating business are calculated using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for individual policies:
The principal assumptions are given in note 42.
For participating business, the Group follows the provisions of the UK Accounting Standard Board's FRS 27 Life Assurance. In accordance with these requirements, the liabilities under insurance contracts and investment contracts with DPF are calculated on the FSA's realistic basis. The key aspects of this methodology are:
The principal assumptions are given in note 42.
(continued)
Present value of future profits ("PVFP") on non participating business in the with profit funds For UK with profit life funds falling within the scope of the FSA realistic capital regime, and hence FRS 27, an amount may be recognised for the PVFP on non participating business written in a with profit fund where the determination of the realistic value of liabilities in that with profit fund takes account, directly or indirectly, of this value.
Where the value of future profits can be shown to be due to policyholders this amount is recognised as a reduction in the liability rather than as an intangible asset, and is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus.
Where it is not possible to apportion the future profits on this non participating business to policyholders the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement.
The value of the PVFP is determined in accordance with the FSA's realistic capital regime. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 42.
Embedded derivatives, including options to surrender insurance contracts, that meet the definition of insurance contracts or are closely related to the host insurance contract, are not separately measured. All other embedded derivatives are separated from the host contract and measured at fair value through profit or loss.
At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared to the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement.
The Group's accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement.
The 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 caption 'Unallocated surplus' represents amounts which have yet to be allocated to equity holders 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).
If the realistic value of liabilities to policyholders exceeds the value of the assets in the with profit fund, the unallocated surplus is valued at £nil.
Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder.
The valuation of liabilities on unit linked contracts is based on the fair value of the related assets and liabilities. The financial liability is measured based on the carrying value of the assets and liabilities that are held to back the contract. The liability is the sum of the unit linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.
Investment income and the movements in the fair value of investment contracts without DPF are included in the 'change in investment contract liabilities' in the consolidated income statement.
On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at fair value through profit or loss for which all transaction costs are expensed).
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts and other liabilities designated at fair value through profit or loss) are measured at amortised cost using the effective interest method.
Financial liabilities are designated upon initial recognition at fair value through profit or loss when doing so results in more meaningful information because either:
Warrants issued by the Company are recognised as a financial liability unless they can be exchanged for a fixed number of the Company's own shares, or are accounted for as equity-settled share-based payments, in which case they are recognised as equity.
The majority of interest-bearing borrowings are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.
Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated above in the financial liabilities accounting policy. Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.
It is the Group's practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, the investments are recognised as 'financial assets' and the collateral repayable is recognised as 'deposits received from reinsurers'.
The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes where the Group has a holding in excess of 50%. This interest is classified at fair value through profit or loss and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, the investments are recognised as 'financial assets' and the collateral repayable is recognised as 'obligations for repayment of collateral received'. The 'obligations for repayment of collateral received' are measured at amortised cost, which in the case of cash is equivalent to cost.
(continued)
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.
Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years.
Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not provided in respect of temporary differences arising from the initial recognition of goodwill and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
Obligations for contributions to defined contribution pension plans are recognised as an expense in the consolidated income statement as incurred.
The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contracts liabilities and investment contracts liabilities.
The movement in the reported surplus/deficit is analysed between the service cost (recognised within administrative expenses in the consolidated income statement), the net interest gain or loss on the liabilities less the expected return on assets, including any reimbursement assets (recognised within net investment income in the consolidated income statement), curtailment gains/losses and actuarial gains and losses (recognised in other comprehensive income). All actuarial gains and losses are recognised in full.
Business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to cash generating units (Phoenix Life and Ignis Asset Management). Goodwill is impaired when the recoverable amount is insufficient to support its carrying value.
Insurance and investment contracts with and without DPF acquired in business combinations and portfolio transfers are measured at fair value at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability measured in accordance with the Group's accounting polices for such contracts is recognised as acquired in-force business.
Acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the economic benefits.
An impairment review is performed whenever there is an indication of impairment. When the recoverable amount is less than the carrying value, an impairment loss is recognised in the consolidated income statement. Acquired in-force business is also considered in the liability adequacy test for each reporting period.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
Intangible assets with finite lives are amortised over their useful economic life and assessed for impairment whenever there is an indication that the fair value of the intangible asset is less than its carrying value.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised.
Owner-occupied property is stated at fair value, being the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction. Owner-occupied property is depreciated over its estimated useful life, which is taken as 50 years, except where the residual value is greater than its carrying value in which case, no depreciation is charged to profit or loss. Land is not depreciated. Gains and losses on owner-occupied property are recognised in the statement of consolidated comprehensive income.
Plant and equipment is stated at cost less accumulated depreciation. Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives.
Investment property is stated at fair value. Fair value is based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.
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.
Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. These investments are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and subsequently are re-measured to fair value. Exchange-traded derivatives are valued at the published bid price, or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. The gain or loss on re-measurement to fair value is recognised in the consolidated income statement.
(continued)
Equities, fixed and variable rate income securities and collective investment schemes are designated as at fair value through profit or loss and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at fair value through profit or loss because they are managed and evaluated on a fair value basis in accordance with the Group's stated risk management policies to maximise returns to equity holders.
Invested cash held in collective investment schemes that are consolidated is recognised as a financial asset rather than cash and cash equivalents.
The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost is impaired. The Group first assesses whether objective evidence of impairment exists for financial assets. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in the collective assessment of impairment.
The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the current bid price on the trade date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument.
For units in unit trusts and shares in open-ended investment companies, fair value is by reference to published bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed-interest bearing deposits is estimated using discounted cash flow techniques.
Financial assets that are lent under the Group's stock lending programme do not qualify for derecognition from the statement of consolidated financial position as the Group retains substantially all the risks and rewards of the transferred assets.
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty.
Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset on the statement of consolidated financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.
Cash and non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement, and therefore continues to be recognised in the statement of consolidated financial position within the appropriate asset classification.
The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies. Reinsurers' share of insurance contract liabilities are dependent on expected claims and benefits arising under the related reinsured policies.
Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
The impairment loss is recorded in the consolidated income statement.
Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related creditor are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement.
Gains or losses on purchasing reinsurance are recognised in the consolidated income statement at the date of purchase and are not amortised. They are the difference between the premiums ceded to reinsurers and the related change in the reinsurers' share of insurance contract liabilities.
Cash and cash equivalents comprise cash balances and short-term deposits with an original maturity term of three months or less at the date of placement. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are deducted from cash and cash equivalents for the purpose of the statement of consolidated cash flows.
A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where the Group has a present legal or constructive obligation but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
A provision is recognised for onerous contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs reflect the least net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
Basic earnings per share is calculated using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares and 'B' ordinary shares in issue during the year.
For the diluted earnings per share, the weighted average number of ordinary shares and 'B' ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, including warrants and potentially issuable ordinary shares.
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group's owners. Interim dividends are deducted from equity when they are paid.
Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.
Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.
Outward reinsurance premiums are accounted for on a payable basis.
(continued)
Fee and commission income relates to the following:
Net investment income comprises interest, dividends, rents receivable, net expected return on pension assets, fair value gains and losses on financial assets and investment property and impairment losses on loans and receivables.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method. Dividend income is recognised in the consolidated income statement on the date the right to receive payments is established, which in the case of listed securities is the ex-dividend date.
Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
Realised and unrealised gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement. Realised gains and losses are the difference between the net sale proceeds and the original cost. Unrealised gains and losses are the difference between the valuation at the period end and their valuation at the previous period end or purchase price, if acquired during the year.
Other operating income comprises the general business result and other non-investment income which is recognised on an accruals basis.
Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and on death are accounted for on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement.
Reinsurance claims are recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.
Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 18.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.
Where the terms and conditions of warrants are modified before they vest, the increase in the fair value of the warrants, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period.
Interest paid is recognised in the consolidated income statement as it accrues and is calculated by using the effective interest method. Accrued interest is included within the carrying value of the interest-bearing financial liability.
The Group has issued ordinary shares and 'B' ordinary shares each of which is classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
Where an employee trust acquires the Company's share capital or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners' equity. Gains and losses on sales of shares held by employee trusts are charged or credited to the own shares account in equity. Any shares in the Company which are purchased by the Company itself would be cancelled automatically by operation of law and would not be held as own shares.
The general insurance businesses have been closed to new business for a number of years and are in run off. The results are included in other operating income within the consolidated income statement. Provisions are made for the estimated cost of claims, including claims incurred but not reported after taking into account handling costs, anticipated inflation and settlement trends. Any difference between the estimated provision and subsequent settlement is included in the consolidated income statement in later years.
The Group's results are analysed across two reportable segments: Phoenix Life and Ignis Asset Management. The revenues generated in each reported segment are shown in the segmental information in note 4.
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.
Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so.
The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial statements are disclosed.
The consolidated financial statements for the year ended 31 December 2009, set out on pages 76 to 157, were authorised by the Board of Directors for issue on 30 March 2010. The financial statements have been prepared in accordance with IFRS adopted for use by the EU and also in accordance with the statutory provision of Part 9, Book 2, of the Netherlands Civil Code.
In preparing the consolidated financial statements the Group has adopted the following standards, amendments and interpretations:
(continued)
The International Accounting Standards Board ("IASB") has issued the following standards, amendments and interpretations which apply from the dates shown. The Group has decided, where permitted, not to adopt any of these standards, amendments or interpretations in advance of their implementation date. The impact of adopting them is not expected to have a material effect on the results of the Group:
In addition, the following standards, amendments and interpretations have been issued but are not currently relevant to the Group:
With effect from 28 August 2009, the Company acquired 100% of the issued share capital of PGH (LCA) Limited (formerly Sun Capital Investments Limited), PGH (LCB) Limited (formerly Hera Investments One Limited), PGH (TC1) Limited (formerly SunCap Parma Topco Limited), PGH (TC2) Limited (formerly TDR Parma Topco Limited) and Opal Reassurance Limited, collectively the 'Pearl businesses', for a total consideration of £493 million. At the same time a third party's interest in a 49.4% holding in Ignis Investment Management Limited (formerly Axial Investment Management Limited) was purchased by Pearl Group Holdings (No. 2) Limited (formerly Pearl Group Limited) ("PGH2") for a consideration of £1. The Pearl businesses are involved in the management of various classes of insurance business and the provision of investment management services through their subsidiary companies.
On 2 September 2009, the date of legal completion of the acquisition, certain external debt of the Pearl businesses was restructured, specifically the £905 million Pearl facility, the £2,260 million Impala facility and the Royal London PIK notes and facility. Of the £825 million outstanding under the £905 million Pearl facility, £325 million was assigned to Phoenix Group Holdings in exchange for £75 million consideration, £75 million of the remaining £500 million was converted into two £37.5 million secured C loan notes and the terms of the remaining £425 million were amended. The terms of the £2,260 million Impala facility were also amended. Of the £350 million Royal London PIK notes and facility outstanding (comprising principal and capitalised interest), £250 million was assigned to Phoenix Group Holdings in exchange for the issue to Royal London of 1.5 million 'B' ordinary shares and 12.36 million warrants for 'B' ordinary shares. The terms of the remaining £100 million PIK notes and facility were then amended. The banks and other lenders involved in this restructuring are collectively known as "the Lenders".
The restructuring formed an integral part of the acquisition transaction and the effect of the restructuring has been incorporated in determining the fair values of certain liabilities at the acquisition date.
The acquisition has been accounted for using the purchase method of accounting. There were no accounting policy adjustments made to the carrying values.
493
| Carrying value |
Fair value adjustments |
Fair value | ||
|---|---|---|---|---|
| Assets | Notes | £m | £m | £m |
| Intangible assets | 33 | 1,839 | 850 | 2,689 |
| Property, plant and equipment | 34 | 35 | – | 35 |
| Investment property | 35 | 1,807 | – | 1,807 |
| Financial assets | 62,269 | 32 | 62,301 | |
| Deferred tax assets | 28 | 98 | – | 98 |
| Insurance assets | 2,983 | – | 2,983 | |
| Current tax | 20 | – | 20 | |
| Deferred acquisition costs | 15 | (15) | – | |
| Prepayments and accrued income | 562 | - | 562 | |
| Other receivables | 821 | 21 | 842 | |
| Cash and cash equivalents | 6,155 | – | 6,155 | |
| Total assets | 76,604 | 888 | 77,492 | |
| Liabilities | ||||
| Pension scheme deficit | 32 | 288 | – | 288 |
| Liabilities under insurance contracts | 20 | 51,413 | – | 51,413 |
| Unallocated surplus | 21 | 546 | – | 546 |
| Borrowings | 4,764 | (529) | 4,235 | |
| Other financial liabilities | 16,450 | – | 16,450 | |
| Provisions | 27 | 121 | – | 121 |
| Deferred tax | 28 | 474 | 319 | 793 |
| Reinsurance payables | 19 | – | 19 | |
| Payables related to direct insurance contracts | 761 | – | 761 | |
| Current tax | 54 | – | 54 | |
| Accruals and deferred income | 296 | (4) | 292 | |
| Other payables | 1,203 | 202 | 1,405 | |
| Total liabilities | 76,389 | (12) | 76,377 | |
| Net assets | 215 | 900 | 1,115 | |
| Less: Non-controlling interests | ||||
| UK Commercial Property Trust Limited | 19 | (181) | ||
| Perpetual Reset Capital Securities | 19 | (518) | ||
| Fair value of net assets acquired | 416 | |||
| Goodwill | 33 | 77 | ||
| Total consideration | 493 | |||
| Satisfied by: | ||||
| Issue of 40.7 million fully paid up 'B' ordinary shares | ||||
| to vendors | (a) | 332 | ||
| Issue of 26.5 million contingent rights over shares to vendors | (b) | 143 | ||
| Issue of warrants to lenders | (c) | 4 | ||
| Issue of 1 million contingent rights over shares in settlement | ||||
| of underwriting fee | (d) | 5 | ||
| Acquisition expenses | (e) | 9 |
The table below summarises the assets and liabilities acquired and the fair value adjustments made at the date of acquisition:
(continued)
The goodwill arising on the acquisition of the Pearl businesses is attributed to the Ignis Asset Management business and the management services operations within Phoenix Life.
The Pearl businesses contributed £514 million to total revenue, net of reinsurance and £178 million profit before tax attributable to owners for the period between the date of acquisition and the period end. The Group's consolidated profit before tax attributable to the owners for the year ended 31 December 2009 of £91 million comprises the entity loss before tax of £87 million together with this contribution from the Pearl businesses of £178 million.
If the acquisition of the Pearl businesses had been completed on the first day of the financial year, Group total revenue, net of reinsurance for the year would have increased by £1,081 million from £541 million to £1,595 million. However, the impact on Group profit has not been disclosed as it is impracticable to calculate this given the complex nature of the acquisition of the Pearl businesses and the associated acquisition accounting.
There is no quoted market price for these contingent rights over shares and therefore an appropriate valuation technique has been used to ascertain their fair value for accounting purposes. A Black–Scholes methodology has been used to value these contingent rights over shares as at the date of the acquisition. The key assumptions used to ascertain the fair value are as follows:
The value of the contingent rights over shares has been calculated at €6.70 (£5.91) per share for the €13 threshold shares, €6.10 (£5.38) per share for the €14 threshold shares and €5.60 (£4.94) per share for the €15 threshold shares.
The value of the warrants has been calculated at £0.75 per warrant. Details of these warrants are given in note 24.
(d) Prior to the acquisition the Company entered into an underwriting agreement with certain of its existing owners, to cover the value of any potential share redemption up to a maximum total of £75 million if required. One million 'B' ordinary shares are to be issued to the underwriters as a contingent fee for agreeing to perform this underwriting service. The issue of the shares is dependent upon the performance of the business in that the shares will be issued if the closing share price is greater than or equal to €15 for 20 consecutive trading days.
There is no quoted market price for these contingent rights over shares and therefore an appropriate valuation technique has been used to ascertain their fair value for accounting purposes. A Black–Scholes methodology has been used to value these contingent rights over shares as at the date of the acquisition. The key assumptions used to ascertain the fair value are as set out in (b) above. The value of these contingent rights over shares has been calculated at €5.60 (£4.94) per share.
(e) As part of the acquisition £9 million of professional fees were incurred. These have been capitalised and included within the total consideration. These costs were paid in the period.
The Group defines and presents operating segments based on the information which is provided to the Board.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.
For management purposes, the Group is organised into business units based on their products and services and has two reportable segments as follows:
Segment performance is evaluated based on profit or loss which in certain respects is measured differently from profit or loss in the consolidated financial statements. Group financing (including finance costs) and owners' taxes are managed on a Group basis and are not allocated to individual operating segments.
Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segment results include those transfers between business segments which are then eliminated on consolidation.
Predominantly all revenues from external customers is sourced in the UK.
No revenue transaction with a single customer amounts to greater than 10% of the Group's revenue.
Predominantly all non-current assets are located in the UK.
(continued)
4.1 Segmental result
| Ignis Asset | Unallocated | ||||
|---|---|---|---|---|---|
| Phoenix Life | Management | corporate | Eliminations | Total | |
| 2009 Net premiums written from: |
£m | £m | £m | £m | £m |
| External customers | 514 | – | – | – | 514 |
| Other segment | – | – | – | – | – |
| 514 | – | – | 514 | ||
| Fees from: | |||||
| External customers | 71 | 30 | – | – | 101 |
| Other segment | – | 28 | – | (28) | – |
| 71 | 58 | – | (28) | 101 | |
| Net investment income: | |||||
| Net investment income | 1,095 | – | (63) | – | 1,032 |
| Offset interest income on interest | |||||
| swaps against interest expenses | – | – | (16) | – | (16) |
| 1,095 | – | (79) | – | 1,016 | |
| Other operating income: | |||||
| Recurring | 49 | – | – | – | 49 |
| Non-recurring | 18 | – | – | – | 18 |
| 67 | – | – | – | 67 | |
| Net income | 1,747 | 58 | (79) | (28) | 1,698 |
| Net policyholder claims and benefits incurred: |
|||||
| Recurring | (760) | – | – | – | (760) |
| Non-recurring | (74) | – | – | – | (74) |
| (834) | – | – | – | (834) | |
| Depreciation and amortisation: Depreciation of property, plant and |
|||||
| equipment | (1) | (1) | – | – | (2) |
| Amortisation of acquired in-force | |||||
| business | (50) | – | – | – | (50) |
| Amortisation of other intangible assets | (6) | (1) | – | – | (7) |
| (57) | (2) | – | – | (59) | |
| Other operating expenses: | |||||
| Recurring | (562) | (43) | (17) | 28 | (594) |
| Non-recurring | (45) | (4) | – | – | (49) |
| (607) | (47) | (17) | 28 | (643) | |
| Total operating expense | (1,498) | (49) | (17) | 28 | (1,536) |
| Profit/(loss) before finance costs | |||||
| and tax | 249 | 9 | (96) | – | 162 |
| Finance costs | (22) | – | (65) | – | (87) |
| Offset interest income on interest | |||||
| swaps against interest expense | – | – | 16 | – | 16 |
| (22) | – | (49) | – | (71) | |
| Profit before tax | 227 | 9 | (145) | – | 91 |
| Tax attributable to policyholders' returns | 60 | – | – | – | 60 |
| Segmental result before the tax | |||||
| attributable to owners | 287 | 9 | (145) | – | 151 |
| Phoenix Life £m |
Ignis Asset Management £m |
Unallocated corporate £m |
Eliminations £m |
Total £m |
|---|---|---|---|---|
| 285 | 14 | (17) | – | 282 |
| 145 | ||||
| (70) | ||||
| (45) | ||||
| (7) | ||||
| (105) | ||||
| – | – | (49) | – | (49) |
| 287 | 9 | (145) | – | 151 |
| 145 9 (45) (6) (101) |
– – – (1) (4) |
– (79) – – – |
– – – – – |
4.2Reconciliation of operating profit/(loss) before adjusting items to the segmental result
Non-recurring items include:
– a charge of £78 million related to the court-approved Guaranteed Annuity Option Compromise scheme for Phoenix & London Assurance Limited. This removed longevity risk from the business whilst providing immediate policyholder cash enhancements and resulted in a charge recognised in the consolidated income statement as a change in insurance contract liabilities and administrative expenses of £74 million and £4 million respectively; and
– other non-recurring items of £27 million include costs associated with the Phoenix Life site rationalisation and associated staff reductions and the Group's transformation programme with its outsourcers.
| Ignis Asset | Unallocated | |||
|---|---|---|---|---|
| 2009 | Phoenix Life £m |
Management £m |
corporate £m |
Total £m |
| Total assets | 76,633 | 303 | – | 76,936 |
| Total liabilities | (71,652) | (120) | (3,024) | (74,796) |
In 2008 the results and net assets relate to unallocated corporate items.
The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
Operating profit for life assurance business is based on expected investment returns on financial investments backing owners and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
(continued)
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items. The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long term business, including unit linked and with profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The investment variances and economic assumption changes excluded from the long term business operating profit reflects the benefit of the reduction in credit spreads on corporate bonds and favourable equity, property and yield movements and are as follows:
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Investment return variances and economic assumption changes on long-term business | 145 | – |
For non long term business including owners' funds, the total investment income, including realised and unrealised gains, is analysed between a calculated longer term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners' funds are as follows:
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Variances on owners' funds of: | ||
| Subsidiary undertakings | 9 | – |
| The Company | (79) | 33 |
| (70) | 33 |
The variances on owners' funds of the Company comprises unrealised fair value losses arising from movements in the fair value of warrants in issue over the Company's shares together with foreign exchange losses experienced in the year.
The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties.
The principal assumptions underlying the calculation of the longer term investment return are:
| 2009 % |
Period ended 31 December 2008 % |
|
|---|---|---|
| Equities | 6.3 | – |
| Property | 5.8 | – |
| Gilts (15 year gilt) | 3.7 | – |
| Other fixed interest (15 year gilt plus 0.6%) | 4.3 | – |
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Fund management based fees | 30 | – |
| Investment contract income | 71 | – |
| 101 | – |
| 2009 | Restated Period ended 31 December 2008 |
|
|---|---|---|
| £m | £m | |
| Investment income | ||
| Interest income on loans and receivables | 76 | 16 |
| Interest income on financial assets designated at fair value through | ||
| profit or loss on initial recognition | 818 | – |
| Dividend income | 321 | – |
| Rental income | 52 | – |
| Net expected return on pension assets | (9) | – |
| 1,258 | 16 | |
| Fair value gains/(losses) | ||
| Financial assets at fair value through profit or loss | ||
| Held for trading – derivatives | (385) | – |
| Designated upon initial recognition | – | 17 |
| Investment property | 159 | – |
| (226) | 17 | |
| Net investment income | 1,032 | 33 |
| Period ended | ||
|---|---|---|
| 2009 £m |
31 December 2008 £m |
|
| General business result | 2 | – |
| Income under Royal London transitional services agreement | 31 | – |
| Insurance claim | 11 | – |
| Other income | 23 | – |
| 67 | – |
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Acquisition costs paid | 8 | – |
(continued)
| 2009 £m |
Period ended 31 December 2008 £m |
|
|---|---|---|
| Employee costs | 65 | – |
| Outsourcer expenses | 58 | – |
| Investment management expenses and transaction costs | 73 | – |
| Non-recurring administrative expenses | 27 | – |
| Operating expenses in respect of investment properties | 11 | – |
| Depreciation of property, plant and equipment | 2 | – |
| Other | 19 | 2 |
| 255 | 2 |
Employee costs comprise:
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Wages and salaries | 56 | – |
| Social security contributions | 5 | – |
| Other pension costs | 4 | – |
| 65 | – |
| 2009 Number |
2008 Number |
|
|---|---|---|
| Average number of persons employed | ||
| Phoenix Life | 875 | – |
| Ignis Asset Management | 534 | – |
| 1,409 | – |
The average number of employees has been presented for the period following the acquisition of the Pearl businesses on 28 August 2009.
The remuneration of the auditors of the Company, including their associates, in respect of services supplied to entities included in the consolidated financial statements was £7.2 million (2008: £0.1 million). No services were provided to associated pension schemes.
| 2009 £m |
Period ended 31 December 2008 £m |
|
|---|---|---|
| Audit of the consolidated financial statements | 0.8 | 0.1 |
| The auditing of accounts of associates of the Company pursuant to legislation | 3.5 | – |
| Other services supplied pursuant to such legislation: | ||
| Audit related | 0.7 | – |
| Services as reporting accountants | 0.2 | – |
| Other services: | ||
| Audit of MCEV supplementary information | 0.6 | – |
| Other | 1.4 | – |
| 7.2 | 0.1 |
| 2009 £m |
Period ended 31 December 2008 £m |
|
|---|---|---|
| Interest expense | ||
| On borrowings at amortised cost | 64 | – |
| On borrowings at fair value through profit or loss | 23 | – |
| 87 | – | |
| Attributable to | ||
| – policyholders | 22 | – |
| – owners | 65 | – |
| 87 | – |
13.1 Current year tax (credit)/charge
| 2009 | Period ended 31 December 2008 |
|
|---|---|---|
| £m | £m | |
| Current tax: | ||
| UK Corporation tax | (15) | – |
| Overseas tax | 5 | – |
| (10) | – | |
| Adjustment in respect of prior years | (3) | – |
| (13) | – | |
| Deferred tax: | ||
| Reversal/(origination) of temporary differences | (51) | – |
| On non profit surpluses | (17) | – |
| On amortisation of acquired in-force business | ||
| On profit arising from the changes in assumptions used for determining insurance | ||
| liabilities in accordance with PS 06/14 | (5) | – |
| Capital allowances in excess of depreciation | 1 | – |
| Pension scheme movements | 16 | – |
| On provisions for future expenditure | (12) | – |
| Utilisation of tax losses | 63 | – |
| Tax losses arising in the current year carried forward | (26) | – |
| (31) | – | |
| Total tax credit | (44) | – |
| Attributable to: | ||
| – policyholders | (60) | – |
| – owners | 16 | – |
| (44) | – |
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax benefit attributable to policyholder earnings was £60 million (2008: £nil).
(continued)
13.2 Tax charged to other comprehensive income
| Period ended | ||
|---|---|---|
| 2009 | 31 December 2008 | |
| £m | £m | |
| Deferred tax on actuarial gains of defined benefit schemes | 31 | – |
| 2009 £m |
Period ended 31 December 2008 £m |
|
|---|---|---|
| Profit before tax | 91 | – |
| Policyholder tax credit | 60 | – |
| Profit before the tax attributable to owners | 151 | – |
| Tax at standard UK* rate of 28% | 42 | – |
| Net tax losses on corporate restructuring not matched in accounts | (63) | – |
| Disallowable expenses | 10 | – |
| Adjustment to tax charge in respect of prior years | (3) | – |
| Decrease in deferred tax on movement in non profit surplus | (51) | – |
| Policyholder tax calculation methodology | 48 | – |
| Tax relief on accrued interest not valued | 11 | – |
| Profits taxed at rates other than 28% | 12 | – |
| Other | 10 | – |
| Owners' tax charge | 16 | – |
| Policyholder tax credit | (60) | – |
| Total tax credit for the year | (44) | – |
* The Group's two operating segments operate predominantly in the UK. The reconciliation of the tax credit has therefore been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
On 30 March 2010 the Board declared a dividend in respect of 2009. Information on this is given in note 48. No dividends have been declared in respect of the previous period.
The profit attributable to owners for the purposes of computing earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.
| Restated | ||
|---|---|---|
| Period ended | ||
| 2009 | 31 December 2008 | |
| £m | £m | |
| Profit for the year | 135 | 31 |
| Share of result attributable to non-controlling interests | (40) | – |
| Profit attributable to owners | 95 | 31 |
The basic earnings per share of 102.9p (2008: 58.1p) has been based on the profit of £95 million (2008 Restated: £31 million) and a weighted average number of ordinary shares outstanding during the year of 92 million (2008: 53 million), calculated as follows:
| Restated | ||
|---|---|---|
| 2009 | 2008 | |
| Number | Number | |
| million | million | |
| Issued ordinary shares at beginning of the year | 53 | – |
| Effect of ordinary shares issued/redeemed | 39 | 53 |
| Weighted average number of ordinary shares | 92 | 53 |
The diluted earnings per share of 89.8p (2008: 45.1p) has been based on the profit of £95 million (2008: £31 million) and a diluted weighted average number of ordinary shares outstanding during the year of 106 million (2008: 69 million) calculated as follows:
| 2009 Number million |
Restated 2008 Number million |
|
|---|---|---|
| Weighted average number of ordinary shares | 92 | 53 |
| Effect of warrants in issue | 14 | 16 |
| Weighted average number of ordinary shares (diluted) | 106 | 69 |
The Founders', Sponsors' and IPO warrants issued in 2008 were dilutive up until 2 September 2009 and had the effect of increasing the weighted average number of ordinary shares by 14 million in calculating the diluted weighted averaged number of ordinary shares.
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 they are anti-dilutive for the periods presented:
Details of the warrants are given in note 24.
The following contingently issuable shares have not been included in the diluted earnings per share figure, as none of the conditions would have been satisfied and therefore no shares would have been issued:
Notes to the consolidated financial statements
(continued)
| 2009 | 2008 | |
|---|---|---|
| £ | £ | |
| Authorised: | ||
| 300 million (2008: 300 million) ordinary shares of €0.0001 each | 22,050 | 22,050 |
| 110 million (2008: nil) 'B' ordinary shares of €0.0001 each | 9,700 | – |
| Nil (2008: 1 million) preferred shares of €0.0001 each | – | 74 |
| 31,750 | 22,124 | |
| Issued and fully paid: | ||
| 80.4 million (2008: 75 million) ordinary shares of €0.0001 each | 6,067 | 5,583 |
| 49.8 million (2008: nil) 'B' ordinary shares of €0.0001 each | 4,383 | – |
| 10,450 | 5,583 |
The holders of the ordinary and 'B' ordinary shares have the same rights to returns and voting. The holders are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.
Ordinary shares and 'B' ordinary shares comprise 62% and 38% respectively of total issued shares.
Movements in share capital during the period:
| 2009 Number |
2009 £ |
2008 Number |
2008 £ |
|
|---|---|---|---|---|
| Share in issue at 1 January 2009 (2 January 2008) | 75,000,000 | 5,583 | – | – |
| Ordinary shares issued to Founders at €0.00124 per unit | – | – | 20,125,000 | 1,505 |
| Redemption of Founders ordinary shares at par | – | – | (5,125,000) | (388) |
| IPO of ordinary shares | – | – | 60,000,000 | 4,466 |
| 'B' ordinary shares issued on acquisition of the | ||||
| Pearl businesses | 40,700,000 | 3,588 | – | – |
| Ordinary shares issued in part settlement of | ||||
| debt restructuring fees | 3,500,000 | 307 | – | – |
| 'B' ordinary shares issued in part settlement of debt | ||||
| restructuring fees | 7,070,000 | 620 | – | – |
| 'B' ordinary shares issued on assignment of PIK notes | ||||
| and facility | 1,500,000 | 131 | – | – |
| 'B' ordinary shares issued to the employee trust | 500,000 | 44 | – | – |
| Ordinary shares redeemed on acquisition of the | ||||
| Pearl businesses | (6,038,344) | (533) | – | – |
| Ordinary shares issued on conversion of warrants | 7,969,076 | 710 | – | – |
| Shares in issue at 31 December | 130,200,732 | 10,450 | 75,000,000 | 5,583 |
On 2 September 2009, 3,500,000 ordinary shares and 7,070,000 'B' ordinary shares were issued in part settlement of debt restructuring fees at a premium of £96 million. On the same date, 40,700,000 'B' ordinary shares were issued to the vendors as consideration for the acquisition of the Pearl businesses. These were issued at a premium of £332 million. A further 1,500,000 'B' ordinary shares were issued in exchange for assignment of PIK notes and facility, and were issued at a premium of £12 million. 500,000 'B' ordinary shares were issued to the Pearl Group Limited Employee Benefit Trust ("PGL EBT") at a premium of £4 million.
On 2 September 2009, 6,038,344 ordinary shares were redeemed at a premium of £41 million.
During the period, 63,298,332 warrants were converted into 7,969,076 ordinary shares. These shares were issued at a premium of £55 million.
| £m | |
|---|---|
| At 2 January 2008 and 1 January 2009 | – |
| Issued in year | 4 |
| At 31 December 2009 | 4 |
This reserve represents the value of the shares transferred to the PGL EBT to satisfy awards granted to employees under the Bonus Share Plan ("BSP") and the Long Term Incentive Plan ("LTIP"). The number of shares held by the PGL EBT at 31 December 2009 was 500,000 (2008: nil).
On 11 January 2008, the Company issued and sold to the Sponsors 8,000,000 Sponsors' warrants in a private placement immediately prior to the consummation of its IPO. The material terms and conditions of the warrants are as for the Founders' and IPO warrants and the details are disclosed in note 24. The fair value of the Sponsors' warrants was estimated by using a binominal valuation model on the date of issue based on certain assumptions.
The Sponsors' warrants were valued at €2.23 on the date of issue before taking account of the trading restriction. The Sponsors gave an undertaking that they would not transfer or sell any of the Sponsors' warrants, or any shares derived from the Sponsors' warrants, until one year after the Company consummated a business combination. Such a restriction reduced the fair value of the Sponsors' warrants below the market value of the public warrants which can be freely traded. The value was reduced to €1.56 on the date of issue after taking into consideration this restriction, using a 30% discount. As the Sponsors paid €1.00 for the warrants, the difference in value of €0.56 is required to be recognised as a charge which equates to £4 million. The fair value of £4 million has been charged over the two-year vesting period. For the year ended 31 December 2009 £2 million has been recognised as a share-based payment charge (31 December 2008: £2 million).
The following information was relevant in the determination of the fair value of the Sponsors' warrants:
| Share price: | €10.00 |
|---|---|
| Exercise price: | €7.00 |
| Expected life: | an expected life equal to the maturity of the option of 5 years is used. |
| Risk free rate: | 3.422% being the yield on German Government Bonds on 13 February 2008. |
| Volatility: | 26% which is the average volatility of shares in a sample of ten companies with a similar market |
| capitalisation. | |
| Dividend yield: | zero |
On 2 September 2009, one half of the 8,000,000 outstanding Sponsors' warrants were converted into 385,838 ordinary shares and the exercise price of the remaining 4,000,000 warrants was increased to €11.00. As the terms of these remaining warrants were modified before vesting, this resulted in a change of fair value. An increase in the exercise price decreases the fair value and therefore, in accordance with IFRS 2, there was no change to the original accounting.
On 24 July 2009, the Company's owners approved the adoption of a suite of share-based incentive plans including the BSP and the LTIP. On 2 September 2009 500,000 'B' ordinary shares were issued to the trustees of the PGL EBT and on 21 September 2009 the Board of Phoenix Group Holdings made recommendations for awards to the Trustee of the PGL EBT in respect of 403,750 'B' ordinary shares under each of the BSP and the LTIP, and approved the issue of a further 307,500 'B' ordinary shares to the trustee of the PGL EBT to be held, together with the original 500,000 'B' ordinary shares, on an unallocated basis pending satisfaction of the performance and vesting conditions. A letter of wishes from Phoenix Group Holdings to the Trustee of the PGL EBT requested the apportionment of 403,750 shares to named individuals under each of the BSP and the LTIP, following satisfaction of performance and vesting conditions. The additional 307,500 shares have not yet been issued to the Trustee of the PGL EBT and the Company is now considering whether these shares should be issued to the Trustee of the PGL EBT, or whether other arrangements should be implemented to enable the Trustee to acquire these shares on market.
(continued)
The rules for the BSP and the LTIP anticipate that awards to participants will be subject to two-year and three-year vesting periods respectively. The rules also note that there are no performance conditions associated with the BSP and following a meeting of the Board of Phoenix Group Holdings on 21 September 2009, the performance conditions attaching to the awards under the LTIP will be the achievement of a premium listing on the London Stock Exchange ("LSE").
As there either are no performance criteria (BSP), or the performance criteria are considered likely to be met (LTIP) the fair value of the awards has been determined assuming that all granted shares vest. The share price at 21 September 2009 has been used in determining the fair value of these awards, this date being the start of the vesting period. The resulting 2009 expense to be recognised in the consolidated income statement in relation to these schemes is £0.6 million (2008: £nil) based on a charge from 21 September 2009 and two and three-year vesting periods for the BSP and LTIP respectively.
On 24 September 2009 it was agreed to grant to the Chairman 300,000 'B' ordinary shares as part of the remuneration package to secure his appointment. The grant date of this award was 24 September 2009 which is the date the Chairman's contract of employment was signed. All vesting conditions are considered to have been met on this date as by signing the contract the Chairman joined the Group and his appointment was thereby secured. The fair value of the award has been determined assuming that all shares vest and using a share price at 24 September 2009 of €9.35. The expense recognised in the income statement in relation to this award is £2.5 million (2008: £nil). After 31 December 2009, the terms of the Chairman's award were amended. Details of these changes can be found in the 'Directors' Interests' section of the Remuneration Report.
| Perpetual Reset Capital Securities £m |
UK Commercial Property Trust Limited £m |
Total £m |
|
|---|---|---|---|
| At 2 January 2008 and 1 January 2009 | – | – | – |
| On acquisition of the Pearl businesses | 518 | 181 | 699 |
| Profit for the year | 9 | 31 | 40 |
| Dividends paid | – | (8) | (8) |
| Effect of share transactions | – | (3) | (3) |
| At 31 December 2009 | 527 | 201 | 728 |
Pearl Group Holdings (No. 1) Limited ("PGH1") has in issue £500 million of Perpetual Reset Capital Securities ("the Notes") which are admitted to the Official List of the UK Listing Authority and to trading on the LSE.
The Notes are unsecured obligations of PGH1 and are subordinate to the claims of senior creditors. Payments in respect of the Notes are conditional upon PGH1 being solvent at the time of payment and immediately following such payment.
The Notes have no fixed maturity date and interest payments may be deferred at the option of PGH1; accordingly the Notes meet the definition of equity for financial reporting purposes. The Notes also meet the conditions for Innovative Tier 1 capital treatment in the calculation of the Group Capital Resources under the rules of the FSA. As the Notes are not directly held by the Company, these are disclosed as a non-controlling interest in the consolidated financial statements.
The Notes may be redeemed at par at the option of PGH1 on the first reset date of 25 April 2016 or on any coupon payment date thereafter. Redemption is subject to the agreement of the FSA. In certain circumstances PGH1 has the right to substitute the Notes or to redeem the Notes before the first reset date.
Coupons are payable annually in arrears on 25 April, at the rate of 6.5864% per annum, until the first reset date. Thereafter coupons are payable semi-annually at 2.73% per annum over the then prevailing offered rate for six-month sterling deposits. The consent of certain Lenders is required to enable the payment of coupons due in 2010 and thereafter.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment by the issue of securities ("ACSM instruments") by either PGH1 or a special purpose subsidiary of PGH1 established for the purpose of issuing ACSM instruments and which are guaranteed by PGH1. The obligations of PGH1 in respect of such securities, or if applicable, guarantee will be subordinated to and rank or be expressed to rank junior to the Notes as to rights to payments of interest and participation in the assets of PGH1 in a winding up and shall comply with the then current requirements of the FSA in relation to Tier 1 Capital. ACSM instruments will in the first instance be offered to related parties (as defined in the Terms and Conditions of the Notes as amended by the Supplemental Trust Deed dated 30 July 2008) and to third parties if not purchased by related parties. In the event that neither such related parties nor third parties will purchase the required ACSM instruments then PGH2 is required to use its best endeavours to raise such funds as are deemed necessary to purchase the required amounts of ACSM instruments.
For so long as a deferred coupon payment has not been satisfied PGH1 may not declare, pay or distribute a dividend on any of its securities in issue ranking junior to the Notes including the ordinary shares of PGH1 or any parity securities or, except in particular circumstances, redeem, purchase or otherwise acquire any of its securities in issue ranking junior to the Notes, including its ordinary shares or any parity securities.
On 25 March 2009, the Board of PGH1 gave notice to the holders of the Notes of its decision to defer the coupon payment on the Notes at the next payment date of 25 April 2009 and PGH1 indicated that it had no present intention to initiate the ACSM.
On 23 March 2010 PGH1 gave notice to the holders of the Notes of its decision to defer the coupon on the Notes which would otherwise have been due for payment on 25 April 2010. PGH1 announced that if certain amending proposals are agreed by the Noteholders this notice will be withdrawn and the 2010 coupon will be paid in full on the first business day after the payment date of 25 April 2010; in addition the deferred 2009 coupon will be paid by 31 December 2010. Further information on this is given in note 48.
UK Commercial Property Trust Limited ("UKCPT") is a property investment subsidiary which is domiciled in Guernsey and listed on the LSE.
| Gross liabilities 2009 £m |
Reinsurers' share 2009 £m |
Gross liabilities 2008 £m |
Reinsurers' share 2008 £m |
|
|---|---|---|---|---|
| Life assurance business: | ||||
| Insurance contracts | 38,965 | 2,860 | – | – |
| Investment contracts with DPF | 11,326 | – | – | – |
| 50,291 | 2,860 | – | – | |
| Amounts due for settlement after 12 months | 40,150 | 2,722 | – | – |
| Gross liabilities £m |
Reinsurers' share £m |
|
|---|---|---|
| At 2 January 2008 and 1 January 2009 | – | – |
| On acquisition of the Pearl businesses | 51,413 | 2,689 |
| Premiums | 545 | 31 |
| Claims | (2,043) | (105) |
| Other changes in liabilities | 361 | 216 |
| Foreign exchange adjustments | 15 | 29 |
| At 31 December 2009 | 50,291 | 2,860 |
Notes to the consolidated financial statements
(continued)
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 2 January 2008 and 1 January 2009 | – | – |
| On acquisition of the Pearl businesses | 546 | – |
| Transfer from income statement | 175 | – |
| At 31 December 2009 | 721 | – |
| 2009 | 2008 | |
|---|---|---|
| Carrying value | £m | £m |
| Debenture loans | ||
| Limited recourse bonds 2012 7.39% (note a) | 48 | – |
| Limited recourse bonds 2022 7.59% (note a) | 86 | – |
| Unsecured loan notes (note b) | 18 | – |
| £200 million 7.25% unsecured subordinated loans (note c) | 119 | – |
| £779 million loan (note d) | 764 | – |
| £15 million loan (note e) | 15 | – |
| £2,260 million syndicated loan (note f) | 2,260 | – |
| £80 million facility agreement (note g) | 42 | – |
| £100 million PIK notes and facility (note h) | 102 | – |
| £75 million secured loan note (note i) | 70 | – |
| £425 million loan facility (note i) | 399 | – |
| 3,923 | – | |
| Refinancing loan (note j) | 258 | – |
| 4,181 | – | |
| Amount due for settlement after 12 months | 4,086 | – |
| 2009 | 2008 | |
|---|---|---|
| Fair value | £m | £m |
| Debenture loans | ||
| Limited recourse bonds 2012 7.39% (note a) | 45 | – |
| Limited recourse bonds 2022 7.59% (note a) | 93 | – |
| Unsecured loan notes (note b) | 18 | – |
| £200 million 7.25% unsecured subordinated loans (note c) | 156 | – |
| £779 million loan (note d) | 751 | – |
| £15 million loan (note e) | 14 | – |
| £2,260 million syndicated loan (note f) | 2,260 | – |
| £80 million facility agreement (note g) | 42 | – |
| £100 million PIK notes and facility (note h) | 102 | – |
| £75 million secured loan note (note i) | 70 | – |
| £425 million loan facility (note i) | 399 | – |
| 3,950 | – | |
| Refinancing loan (note j) | 258 | – |
| 4,208 | – |
(a) In 1998, National Provident Institution raised £260 million of capital through the securitisation of embedded value on a block of existing unit linked and unitised with profit life and pension policies. Following the demutualisation of National Provident Institution, these were transferred to National Provident Life Limited ("NPLL"). The bonds are split between two classes, which rank pari passu. The £140 million 7.39% class A1 limited recourse bonds with an outstanding principal of £42 million have an average remaining life of two years maturing in 2012. The £120 million 7.59% limited recourse bonds with an outstanding principal of £120 million have an average remaining life of nine years maturing in 2022. NPLL has provided collateral of £88 million to provide security to the holders of the NPLL recourse bonds in issue.
Phoenix Group Holdings acquired these bonds as part of the acquisition of the Pearl businesses and they were recognised at their fair value.
(continued)
The borrowings under the £2,260 million facility are secured by:
The borrowings under the £425 million facility are secured by first fixed and floating charges over all of the assets and undertakings of PGH (LCA) Limited and PGH (LCB) Limited (including their respective 50% shareholdings in Phoenix Life Holdings Limited ("PLHL"), all real estate, book debts, bank accounts, investments and other assets).
(j) The refinancing loan from Abbey National plc was acquired as part of the acquisition of the Pearl businesses. The loan was brought into the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Abbey National plc finances to the value of the associated property reversions. As part of the arrangement Abbey National plc receive an amount calculated by reference to the movement in the Halifax House Price Index and NPLL and NPI Limited ("NPI") have undertaken to indemnify Abbey National plc against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Carrying value | ||
| At 31 December | 431 | – |
| Amount due for settlement after 12 months | 394 | – |
| 2009 £m |
2008 £m |
|
| Fair value | ||
| At 31 December | 431 | – |
In addition to receiving the cash collateral set out above, it is also the Group's practice to obtain collateral in the form of marketable securities. This collateral is held on behalf of the Group and is not recognised on the statement of consolidated financial position as either an asset or an associated liability as the Group is not permitted to sell or re-pledge the collateral in the absence of default. The total value of the collateral held under such arrangements in respect of reinsurance treaties was £1,846 million (2008: £nil)
The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management.
The fair values of derivative financial instruments are as follows:
| 2009 Assets £m |
2009 Liabilities £m |
2008 Assets £m |
Restated 2008 Liabilities £m |
|---|---|---|---|
| – | 23 | – | 11 |
| 189 | 181 | – | – |
| 4 | 29 | – | – |
| 1,683 | 1,430 | – | – |
| 285 | – | – | – |
| 20 | 2 | – | – |
| 27 | – | – | – |
| 191 | – | – | – |
| 1,141 | 1,177 | – | – |
| 3,540 | 2,842 | – | 11 |
(continued)
The amount recoverable after one year is £2,143 million (2008: £nil). The amount payable after one year is £1,394 million (2008: £nil).
Certain cash collateral on derivatives is available to the Group for investment purposes and is therefore recognised as a financial asset and a liability, recorded as 'Obligations for repayment of collateral received' in the statement of consolidated financial position. At 31 December 2009, the amount of collateral recognised as a financial asset and 'Obligations for repayment of collateral received' amounted to £1,041 million (2008: £nil) and £1,099 million (2008: £nil) respectively.
Where collateral has been pledged by the Group and the right of set off is only enforceable on the occurrence of a particular future event then the pledged asset continues to be recognised by the Group. On the same basis the Group does not recognise collateral pledged by counterparties. Off balance sheet derivative collateral at 31 December 2009 which had been pledged to/by the Group amounted to £188 million (2008: £nil) and £455 million (2008: £nil) respectively.
In 2008 Phoenix Group Holdings issued 20.12 million Founders' warrants and 60 million IPO warrants. On 2 September 2009 12.36 million warrants were issued to Royal London and 5 million were issued to the Lenders. The table below shows a reconciliation of the outstanding number of these warrants:
| IPO | Founders' | Lenders' | Royal London |
|---|---|---|---|
| warrants Number |
|||
| – | – | – | – |
| – | 20,125,000 | – | – |
| – | (5,125,000) | – | – |
| 60,000,000 | – | – | – |
| 60,000,000 | 15,000,000 | – | – |
| – | (63,600) | – | – |
| (30,000,000) | (7,468,200) | – | – |
| – | – | 5,000,000 | 12,360,000 |
| (21,830,132) | – | – | – |
| 8,169,868 | 7,468,200 | 5,000,000 | 12,360,000 |
| warrants Number |
warrants Number |
warrants Number |
The IPO and Founders' warrants originally entitled the holder to purchase one ordinary share at a price of €7.00 per share, subject to adjustment, at any time commencing on the consummation of a business combination. On 2 September 2009 the exercise price was increased to €11.
The exercise period commenced on the later of:
The warrants will expire at the close of trading on Euronext on the first business day after 6 February 2013 or earlier upon redemption or liquidation. Once the warrants become exercisable, the Company may call the warrants for redemption:
If the foregoing conditions are satisfied and the Company issues notice of redemption of the warrants, each warrant holder shall be entitled to exercise their warrant prior to the scheduled redemption date. However, the price of the shares may fall below the redemption trigger price or the warrant exercise price after the redemption notice is issued.
If the Company calls the warrants for redemption as described above, it will have the option to require any holder that wishes to exercise its warrant (including the Founders' warrants) to do so on a cashless basis.
The Founders' and IPO warrants are listed and are valued using the warrant price quoted on Euronext for the Company. At 31 December 2009 the Founders' warrants were valued at £7 million (2008: £2 million) and the IPO warrants were valued at £8 million (2008: £9 million).
On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitle the holder to purchase one 'B' ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of a premium listing of the ordinary shares on the LSE, the Lenders' warrants will be over ordinary shares rather than 'B' ordinary shares.
The exercise period commences on the date of the warrant agreement and terminates on the first to occur of:
The Company can issue a similar number of ordinary shares instead of 'B' ordinary shares. This is effective from the earlier of:
All outstanding warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £19.50 on each of 20 consecutive trading days. The Company must give not less than 30 days' notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
The holders are entitled to exercise their warrants for cash, assignment of an amount of outstanding principal/accrued interest of any Global Debt (i.e. any debt owed to the registered holder by any Group company) or on a cashless basis where the Company redeems the warrants. Any warrant either not exercised or tendered back to the Company by the redemption date shall be cancelled on the books of the Company and have no further value except for the €0.01 redemption price.
These Lenders' warrants are not traded in an active market and have therefore been valued using a Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2009 are as follows:
The value of the warrants at the year end was £2 million (2008: £nil).
(continued)
On 2 September 2009, the Company issued 12.36 million warrants (2 million transferable and 10.36 million nontransferable) over its shares to Royal London as part consideration for acquiring the benefit of £250 million of the PIK notes and facility outstanding (comprising principal and capitalised interest). These warrants entitle the holder to purchase one 'B' ordinary share at a price of €11 per share, subject to adjustment. Following the achievement of a premium listing of the ordinary shares on the LSE, the Royal London warrants will be over ordinary shares rather than 'B' ordinary shares.
The exercise period commences on the date of the warrant agreement and terminates on the first to occur of:
The Company can issue a like number of ordinary shares instead of 'B' ordinary shares. This is effective from the earlier of:
All outstanding warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds €16.50 on each of 20 consecutive trading days. The Company must give not less than 30 days' notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any part) at its option.
The holders are entitled to exercise their warrants for cash, assignment of an amount of outstanding principal plus accrued interest of any Global Debt (i.e. the PIK facility) or on a cashless basis where the Company redeems the warrants. Any warrant either not exercised or tendered back to the Company by the redemption date shall be cancelled on the books of the Company and have no further value except for the €0.01 redemption price.
The Royal London warrants are not traded in an active market and have therefore been valued using a Black-Scholes valuation model.
The key assumptions used to ascertain a value as at 31 December 2009 are as for the Lenders' warrants (see above). The value of the warrants at the year end was £6 million (2008: £nil).
| 2009 £m |
2008 £m |
|
|---|---|---|
| Carrying value | ||
| At 31 December | 4,106 | – |
| Amount due for settlement after 12 months | 1,054 | – |
| 2009 £m |
2008 £m |
|
|---|---|---|
| Fair value | ||
| At 31 December | 4,106 | – |
| 2009 £m |
Restated 2008 £m |
|
|---|---|---|
| Carrying value | ||
| Financial liabilities at fair value through profit or loss: | ||
| Designated upon initial recognition | 9,774 | – |
| Held for trading – derivatives | 2,842 | 11 |
| Financial liabilities measured at amortised cost | 8,460 | – |
| 21,076 | 11 | |
| Amount due for settlement after 12 months | 6,928 | – |
| 2009 £m |
Restated 2008 £m |
|
|---|---|---|
| Fair value | ||
| Financial liabilities at fair value through profit or loss: | ||
| Designated upon initial recognition | 9,774 | – |
| Held for trading – derivatives | 2,842 | 11 |
| Financial liabilities measured at amortised cost | 8,487 | – |
| 21,103 | 11 |
| Restructuring £m |
Leasehold properties £m |
Staff related £m |
Known incidents £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|---|
| At 2 January 2008 and 1 January 2009 | – | – | – | – | – | – |
| On acquisition of the Pearl businesses | 13 | 38 | 22 | 18 | 30 | 121 |
| Additions in the year | – | 2 | – | – | 12 | 14 |
| Utilised during the year | (5) | (2) | (3) | (4) | (10) | (24) |
| Released during the year | (1) | (1) | (3) | (6) | – | (11) |
| Effect of discounting and of changes in the | ||||||
| discount rate | – | – | 1 | – | – | 1 |
| At 31 December 2009 | 7 | 37 | 17 | 8 | 32 | 101 |
The restructuring provision relates principally to the anticipated redundancy costs associated with the closure of the Group's Glasgow and Peterborough life operations, which is expected to occur in 2010 and 2011.
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used ranged between 5.00% and 6.07% and it is expected that the provision will be utilised over the next eight years.
Staff related provisions primarily relate to redundancy costs of staff that have been transferred under outsourcing contracts. This provision will be utilised over the next two years.
(continued)
The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced.
Included in other provisions is £9 million in respect of investment contracts representing the excess of future costs over future charges on the Group's unit linked business, assessed at a product level. The discount rate used in calculating the provision is 4.00% and the provision is expected to run off over the remaining life of the business, estimated at 30 years. The remainder of the balance includes litigation and onerous contract provisions.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Current tax receivables | 44 | – |
| Net deferred tax assets | 81 | – |
| Total tax assets | 125 | – |
| Current tax payables | 103 | – |
| Net deferred tax liabilities | 776 | – |
| Total tax liabilities | 879 | – |
| 2009 £m |
2008 £m |
|
|---|---|---|
| Trading losses | 28 | – |
| Expenses and deferred acquisition costs carried forward | 142 | – |
| Provisions and other temporary differences | 30 | – |
| Pension scheme deficit | 34 | – |
| Accelerated capital allowances | 24 | – |
| Unpaid interest | 45 | – |
| Gross deferred tax assets | 303 | – |
| Less: offset against deferred tax liabilities | (222) | – |
| Net deferred tax assets | 81 | – |
| 2009 £m |
2008 £m |
|
|---|---|---|
| Acquired in-force business | 736 | – |
| Unrealised gains on investments | 7 | – |
| Surplus within the non profit funds | 96 | – |
| Provisions and other temporary differences | 19 | – |
| Adjustment for insurance policies held with related | ||
| parties in respect of the PGL Pension Scheme | 17 | – |
| Intangible assets | 123 | – |
| Gross deferred tax liabilities | 998 | – |
| Less: offset against deferred tax assets | (222) | – |
| Net deferred tax liabilities | 776 | – |
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 1 January 2009 (2 January 2008) | – | – |
| On acquisition of the Pearl businesses | (695) | – |
| Amounts credited to the income statement | 31 | – |
| Amounts charged to the statement of other | ||
| comprehensive income | (31) | – |
| At 31 December | (695) | – |
Deferred tax has been provided on the surpluses within the non profit funds on the assumption that all such surpluses will eventually be distributed to owners.
Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Deferred tax assets have not been recognised in respect of: | ||
| Tax losses carried forward | 141 | – |
| Excess expenses and deferred acquisition costs carried forward | 50 | – |
| Provisions and other temporary differences | 3 | – |
| Deferred tax assets not recognised on capital losses | 210 | – |
These can only be offset against future capital gains and no expiry date.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Payables related to direct insurance contracts | 759 | – |
| Amount due for settlement after 12 months | 66 | – |
Due to the historic diversity of issued general insurance policies and taking into account the legal and regulatory environment for hazardous risks, it is possible that additional claims could emerge from long tail unexpired risks albeit it is not possible to predict the quantum, location or timing of such occurrences.
The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business and as a consequence of this uncertainty the eventual costs of settlement of outstanding claims and unexpired risks can vary substantially from the estimates.
(continued)
Within Pearl Assurance plc ("Pearl") the provision for the future claims payments has primarily been assessed in accordance with actuarial methods projecting the number and amount of claims separately. Where there is a notable exposure to long term asbestos, pollution and health hazard liabilities, external independent actuaries provide best estimate benchmarks. An appropriate prudential margin is applied to certain lines of business as it is recognised that the estimation of certain future claims payments is an inherently uncertain exercise and future experience could be more adverse.
In calculating the provisions in respect of long-term UK Industrial disease business the future investment income on the assets held to cover the related provisions has been taken into account by discounting future cash flows. The average period before the undiscounted liability will be settled has been estimated at 14 years for 2009 and the provision has been discounted at 2.5% per annum.
The overall effect is to reduce the gross and net claims outstanding financial liability for those classes of business referred to above at 31 December 2009 by £9 million from £35 million to £26 million. The total amount of the investment return which corresponds to the unwinding of the discount is £0.6 million.
Within PA (GI) Limited the provision for outstanding general insurance claims comprises the estimated ultimate cost of settling claims notified but not settled by the period end. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The general insurance liabilities of PA (GI) Limited are wholly reinsured externally to RSA .
| 2009 £m |
2008 £m |
|
|---|---|---|
| Accruals | 177 | 9 |
Amount due for settlement after 12 months 4 –
| 2009 | 2008 | |
|---|---|---|
| £m | £m | |
| Investment broker balances | 420 | – |
| Other payables | 230 | – |
| 650 | – | |
| Amount due for settlement after 12 months | 8 | – |
The Group operates two staff Pension Schemes, the Pearl Group Staff Pension Scheme and the PGL Pension Scheme.
The carrying value of the defined benefit pension schemes is set out below:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Pearl Group Staff Pension Scheme deficit | (121) | – |
| PGL Pension Scheme – economic surplus | 62 | – |
| Adjustment for insurance policies held with related parties and eliminated on consolidation | (66) | – |
| PGL Pension Scheme – reported deficit | (4) | – |
| Total deficit | (125) | – |
Information on each of these schemes is set out below. This principally relates to the period from 28 August 2009 to 31 December 2009.
The Pearl Group Staff Pension Scheme ("the Pearl Scheme") comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The final salary and hybrid sections of the Pearl Scheme are closed to new members.
Defined contribution scheme
The Group participates in the defined contribution section of the Pearl Scheme. Contributions in the period 28 August to 31 December 2009 amounted to approximately £1 million.
The Pearl Scheme is funded by payment of contributions to a separately administered trust fund and is subject to regular valuations by an independent qualified actuary. A Group company, PGH2 is the principal employer of the Pearl Scheme.
Given the deficit in the Pearl Scheme, the principal employer and the Trustees of the Pearl Scheme entered into an agreement effective 2 September 2009, the principal terms of which provided for the following:
In addition, the principal employer meets the administration expenses of the Pearl Scheme.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2009, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
(continued)
The principal financial assumptions of the Pearl Scheme are set out below:
| 2009 | 2008 | |
|---|---|---|
| % | % | |
| Rate of general long-term increase in salaries | 4.5 | – |
| Rate of increase in pensions | 3.5 | – |
| Discount rate | 5.7 | – |
| Inflation | 3.5 | – |
| Expected rate of return on scheme assets | 5.1 | – |
The discount rate and inflation rate assumptions used for the calculation of the liabilities have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme liabilities. This method determines an equivalent single rate for both the discount and inflation rates, which is derived from the profile of projected benefit payments.
The expected rate of return on scheme assets is derived after considering historical returns and assuming that asset classes with higher volatility generate higher returns (consistent with widely accepted capital market principles). The overall expected return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation.
It has been assumed that post-retirement mortality is in line with standard tables PMA92C2009 for males and PFA92C2009 for females, based on year of use and including Medium Cohort projections for future mortality improvements. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 26.8 years and 29.8 years for male and female members respectively.
The amounts recognised in the income statement are as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Current service cost | – | – |
| Interest cost | (32) | – |
| Expected return on scheme assets | 27 | – |
| (5) | – |
The net actuarial gains and losses recognised in other comprehensive income comprise the following:
| 2009 | 2008 |
|---|---|
| £m | |
| – | |
| – | |
| – – |
|
| £m 36 58 (65) 29 |
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £29 million.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Fair value of scheme assets | 1,684 | – |
| Present value of defined benefit obligation | (1,805) | – |
| Deficit | (121) | – |
The actual return on the scheme assets comprises the following:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Expected return on scheme assets | 27 | – |
| Actuarial gains on scheme assets | 36 | – |
| 63 | – |
The change in the present value of the defined benefit obligation is as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 1 January 2009 (2 January 2008) | – | – |
| On acquisition of the Pearl businesses | 1,791 | – |
| Current service cost | – | – |
| Interest cost | 32 | – |
| Actuarial losses | 7 | – |
| Benefits paid | (25) | – |
| At 31 December | 1,805 | – |
The defined benefit obligation arises from plans that are wholly or partly funded.
The change in the fair value of the scheme assets is as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 1 January 2009 (2 January 2008) | – | – |
| On acquisition of the Pearl businesses | 1,583 | – |
| Expected return on scheme assets | 27 | – |
| Actuarial gains on scheme assets | 36 | – |
| Contributions by the employer | 63 | – |
| Benefits paid | (25) | – |
| At 31 December | 1,684 | – |
(continued)
The distribution of the scheme assets at the end of the year was as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Equities | 318 | – |
| Bonds | 1,215 | – |
| Properties | 63 | – |
| Cash | 72 | – |
| Other | 16 | – |
| 1,684 | – |
Contributions totalling £25 million are expected to be paid into the scheme in 2010 in accordance with the agreement with the Trustees of the Pearl Scheme.
Table of historical information from 2009
| 2009 | |
|---|---|
| £m | |
| Fair value of scheme assets | 1,684 |
| Defined benefit obligation | (1,805) |
| Deficit | (121) |
| Experience gains on scheme assets | 36 |
| Experience gains on scheme liabilities | 58 |
Defined contribution scheme
The Group participates in the defined contribution section of the PGL Pension Scheme ("the PGL Scheme"). Contributions in the period from 28 August 2009 to 31 December 2009 amounted to £1 million.
The defined benefit section of the PGL Scheme is a final salary arrangement which is generally closed to new entrants and, in respect of former members of the Phoenix Life Group pension scheme (which merged with the PGL Scheme in 2006) to future service accruals.
The valuation has been based on an assessment of the liabilities of the PGL Scheme as at 31 December 2009, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
The principal financial assumptions of the PGL Scheme are set out below:
| 2009 % |
2008 % |
|
|---|---|---|
| Rate of general long term increase in salaries | 4.6 | – |
| Rate of increase in pensions | 3.5 | – |
| Discount rate | 5.7 | – |
| Inflation | 3.6 | – |
| Expected rate of return on scheme assets | 5.4 | – |
The discount rate and inflation assumptions used for the calculation of the liabilities have been determined by considering the shape of the appropriate yield curves and the duration of the PGL Scheme liabilities. This method determines an equivalent single rate for both the discount and inflation rates, which is derived from the profile of projected benefit payments.
The expected rate of return on scheme assets is derived after considering historical returns and assuming that asset classes with higher volatility generate higher returns (consistent with widely accepted capital market principles). The overall expected return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation.
It has been assumed that post retirement mortality is in line with standard tables PNA00 with a scaling factor of 105% being applied, allowing for future improvements in line with the long cohort improvement factors, subject to a minimum improvement from 2007 onwards of 1.25% p.a. and 0.75% p.a. for males and females respectively. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 57 is 33.9 years and 35.0 years for male and female members respectively. The average life expectancy from retirement for a member currently aged 50 retiring at age 57 is 32.5 years and 34.2 years for male and female members respectively.
The economic value of the PGL Scheme assets as at 31 December 2009 amounted to £1,192 million and the economic value of the surplus amounted to £62 million. For financial reporting purposes the carrying value of the insurance policies effected by the PGL Scheme with the Group amounting to £66 million have been eliminated on consolidation, resulting in reported assets of the PGL Scheme as at 31 December 2009 of £1,126 million and a reported deficit of £4 million.
The amounts recognised in the income statement are as follows:
| 2009 | 2008 | |
|---|---|---|
| Current service cost | £m (2) |
£m – |
| Interest cost | (21) | – |
| Expected return on scheme assets | 17 | – |
| (6) | – |
The net actuarial gains and losses recognised in other comprehensive income comprise the following:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Actual return less expected return on scheme assets | 23 | – |
| Experience gain arising on scheme liabilities | 18 | – |
| Gain due to changes in assumptions underlying scheme liabilities | 35 | – |
| Actuarial gain | 76 | – |
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £76 million.
| 2009 | 2008 | |
|---|---|---|
| £m | £m | |
| Fair value of scheme assets | 1,126 | – |
| Present value of defined benefit obligation | (1,130) | – |
| Deficit | (4) | – |
(continued)
The actual return on the scheme assets comprises the following:
| 2009 | 2008 | |
|---|---|---|
| £m | £m | |
| Expected return on scheme assets | 17 | – |
| Actuarial gains on scheme assets | 23 | – |
| 40 | – |
The change in the present value of the defined benefit obligation is as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 1 January 2009 (2 January 2008) | – | – |
| On acquisition of the Pearl businesses | 1,176 | – |
| Current service cost | 2 | – |
| Interest cost | 21 | – |
| Actuarial gains | (53) | – |
| Benefits paid | (16) | – |
| At 31 December | 1,130 | – |
The defined benefit obligation arises from plans that are wholly or partly funded.
The change in the fair value of the scheme assets is as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| At 1 January 2009 (2 January 2008) | – | – |
| On acquisition of the Pearl businesses | 1,096 | – |
| Expected return on scheme assets | 17 | – |
| Actuarial gain on scheme assets | 23 | – |
| Contributions by the employer | 6 | – |
| Benefits paid | (16) | – |
| At 31 December | 1,126 | – |
The distribution of the scheme assets at the end of the year was as follows:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Bonds | 995 | – |
| Properties | 110 | – |
| Cash and other | 21 | – |
| 1,126 | – |
Contributions totalling £15 million are expected to be paid into the scheme in 2010.
Table of historical information from 2009:
| 2009 | |
|---|---|
| £m | |
| Fair value of scheme assets | 1,126 |
| Defined benefit obligation | (1,130) |
| Deficit | (4) |
| Experience gains on scheme assets | 23 |
| Experience gains on scheme liabilities | 18 |
| Goodwill | Acquired in-force business |
Customer relationships |
Present value of future profits |
Total | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| Cost or valuation At 2 January 2008 and 1 January 2009 |
– | – | – | – | – |
| On acquisition of the Pearl businesses | 77 | 2,213 | 445 | 31 | 2,766 |
| Revaluation | – | – | – | 4 | 4 |
| At 31 December 2009 | 77 | 2,213 | 445 | 35 | 2,770 |
| Amortisation | |||||
| At 2 January 2008 and 1 January 2009 | – | – | – | – | – |
| Amortisation charge for the year | – | 50 | 7 | – | 57 |
| At 31 December 2009 | – | 50 | 7 | – | 57 |
| Carrying amount | |||||
| At 31 December 2009 | 77 | 2,163 | 438 | 35 | 2,713 |
| Amount recoverable after 12 months | 77 | 1,992 | 420 | 35 | 2,524 |
Goodwill of £77 million was created upon the acquisition of the Pearl businesses and is not amortised. The carrying value of goodwill has been tested for impairment at the period end. No impairment has resulted as the value in use of this intangible continues to exceed its carrying value. Value in use has been determined as the present value of certain future cash flows associated with the Ignis Asset Management business and the management services business of the Phoenix Life segment. The cash flows used in this calculation are consistent with those adopted by management in the Group's operating plan and for the period 2014 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. Future cash flows have been valued using a discount rate of 10.0%.
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million and to the Ignis Asset Management segment is £38 million.
Acquired in-force business of £2,213 million was recognised upon the acquisition of the Pearl businesses and represents the difference between the fair value of the contractual rights acquired and obligations assumed under insurance and investment contracts with and without DPF and the liability measured in accordance with the Group's accounting policies for such contracts.
The acquired in-force business is allocated to the Phoenix Life segment.
(continued)
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.
The second part of the customer relationships intangible relates to the Investment Management Contracts ("IMCs") held within Ignis Asset Management. These are further split into IMCs held with open ended funds and institutional mandates. The open ended IMCs had a value at acquisition of £130 million and an indefinite useful economic life ("UEL"). The reason for the indefinite UEL is that funds are open ended and indefinite in nature. An impairment review has been completed for these intangibles at the period end with an indefinite life and no impairment has arisen. Under this impairment review, value in use has been determined as the present value of future cash flows associated with the open-ended IMCs. The cash flows used in this calculation are consistent with those adopted by management in the Group's operating plan with a declining growth rate assumed for the extended forecast period beyond the period of this plan and a terminal value applied at the year where growth stabilises to 2% per annum. Future cash flows have been valued using a discount rate of 11.4%. The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between five and seven years. These IMC customer relationships intangibles have been allocated to the Ignis Asset Management segment.
The amortisation in relation to these customer relationship intangibles is presented separately on the consolidated income statement.
The value of the PVFP is determined in accordance with the FSA's realistic capital regime and is allocated in full to the Phoenix Life segment. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note 42.5.1.
During the year £4 million of PVFP was credited directly to the consolidated income statement.
| £m | |
|---|---|
| Cost or valuation | |
| At 2 January 2008 and 1 January 2009 | – |
| On acquisition of the Pearl businesses | 35 |
| Additions | 1 |
| At 31 December 2009 | 36 |
| At 2 January 2008 and 1 January 2009 | – |
|---|---|
| Charge for the year | (2) |
| At 31 December 2009 | (2) |
| Carrying amount | |
| At 31 December 2009 | 34 |
The useful lives of plant and equipment have been taken as follows: motor vehicles three to four years, computer equipment three to four years, furniture and office equipment five to ten years.
The valuation of land and buildings is carried out at least every three years as at 31 December by external surveyors in accordance with the Royal Institution of Chartered Surveyors' requirements under an open market valuation basis. The latest valuation was undertaken on 31 December 2009.
| £m | |
|---|---|
| At 2 January 2008 and 1 January 2009 | – |
| On acquisition of the Pearl businesses | 1,807 |
| Additions | 189 |
| Improvements | 5 |
| Disposals | (245) |
| Gains on adjustments to fair value | 159 |
| At 31 December 2009 | 1,915 |
Investment property is stated at fair value and is independently valued in accordance with the Royal Institute of Chartered Surveyors' guidelines on the basis of the open market value of such properties.
Investment properties include £252 million property reversions arising from sales of the NPI Extra Income Plan. The reversionary interest is valued as the NPI and NPLL proportion of the current market value, projected for the lifetime of the policyholder at the assumed future increase in house prices, then discounted back by the valuation rate of interest.
Direct operating expenses (included within administrative expenses) in respect of investment properties that generated rental income during the year amounted to £8 million. The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £3 million.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Loans and receivables at amortised cost | 1,081 | – |
| Financial assets at fair value through profit or loss | ||
| Held for trading – derivatives | 3,540 | – |
| Designated upon initial recognition | ||
| Equities | 13,151 | – |
| Fixed and variable rate income securities | 37,658 | – |
| Collective investment schemes | 6,094 | – |
| 61,524 | – | |
| Amount recoverable after 12 months | 39,822 | – |
The fair value of loans and receivables at amortised cost amounted to £1,074 million (2008: £nil).
Determination of fair value and fair value hierarchy of financial instruments
The fair value of financial instruments traded in active markets (such as publicly traded securities and derivatives) is based on quoted market prices at the period end. The quoted market price used for financial assets is the current bid price on the trade date. If the bid price is unavailable a 'last traded' approach is adopted. For units in unit trusts and shares in open ended investment companies, fair value is by reference to published bid values.
(continued)
The fair values of investments that are not traded in an active market are determined using valuation techniques with observable market inputs. The fair value of shares and other variable yield securities and of derivative financial instruments, are estimated using pricing models, discounted cash flow techniques or broker quotes. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument.
The Group's financial assets determined by valuation techniques using non observable inputs are based on a combination of independent third party evidence and internally developed models. Third party evidence in the form of net asset valuation statements, are used in the valuation of the majority of indirect property, private equity and hedge funds. Broker quotes are received for certain bonds where the market is considered to be inactive. Internally developed models have been used in the valuation of a small number of investment vehicles which due to their nature and complexity have no external market. Inputs into the internally developed models are based on market observable data where available.
Fair value hierarchy of financial instruments measured at fair value
| Total fair | ||||
|---|---|---|---|---|
| At 31 December 2009 | Level 1 £m |
Level 2 £m |
Level 3 £m |
value £m |
| Financial assets at fair value | ||||
| Derivatives | 1,312 | 2,228 | – | 3,540 |
| Financial assets designated at fair value through profit | ||||
| or loss upon initial recognition | ||||
| Equities | 11,012 | 645 | 1,494 | 13,151 |
| Fixed and variable rate income securities | 33,672 | 3,167 | 819 | 37,658 |
| Collective investment schemes | 5,859 | – | 235 | 6,094 |
| 50,543 | 3,812 | 2,548 | 56,903 | |
| Total financial assets at fair value | 51,855 | 6,040 | 2,548 | 60,443 |
| At 31 December 2009 | Level 1 £m |
Level 2 £m |
Level 3 £m |
Total fair value £m |
|---|---|---|---|---|
| Financial liabilities at fair value | ||||
| Derivatives | 1,297 | 1,545 | – | 2,842 |
| Financial liabilities designated at fair value through profit | ||||
| or loss upon initial recognition | ||||
| Investment contract liabilities | – | 8,570 | – | 8,570 |
| Borrowings | – | 258 | – | 258 |
| Net asset value attributable to unitholders | 792 | – | 154 | 946 |
| 792 | 8,828 | 154 | 9,774 | |
| Total financial liabilities at fair value | 2,089 | 10,373 | 154 | 12,616 |
Included in Level 3 investments are two property investment structures with a value of £106 million and £110 million respectively.
The first of these investment has been independently valued using a multi scenario discounted cash flow model. Under the optimistic scenario, the fair value of the investment would increase by £18 million and in the worst case scenario the fair value would decrease by £8 million.
The second investment has been valued by taking the fair value of the property within the structure, which has been independently valued, less the fair value of the debt within the structure. The valuation is sensitive to movements in yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the investment by £19 million and a reduction in yields of 25bps would increase the value by £21 million.
Level 3 investments in indirect property, private equity and hedge funds are valued using net asset statements provided by independent third parties and therefore no sensitivity analysis has been prepared.
Debt securities categorised as Level 3 investments are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Significant transfers of financial instruments between Level 1 and Level 2
| From Level 1 to Level 2 |
From Level 2 to Level 1 |
|
|---|---|---|
| At 31 December 2009 | £m | £m |
| Financial assets at fair value | ||
| Derivatives | – | – |
| Financial assets designated at fair value through profit or loss upon initial recognition | ||
| Equities | – | – |
| Fixed and variable rate income securities | 226 | 334 |
| Collective investment schemes | – | – |
| 226 | 334 | |
| Financial liabilities at fair value | ||
| Derivatives | 9 | – |
| Financial liabilities designated at fair value through profit or loss upon initial recognition | ||
| Investment contract liabilities | – | – |
| Borrowings | – | – |
| Net asset value attributable to unitholders | – | – |
| 9 | – |
2009 saw an improvement in the liquidity of the fixed and variable rate securities market which has resulted in a number of securities moving from Level 2 into Level 1. There were however, a number of securities that moved from Level 1 to 2 as a result of a downgrading in their credit rating. These securities were mainly in the financial sector with issuers such as banks and insurance companies.
Movement in Level 3 financial instruments measured at fair value
| At 1 January 2009 £m |
Arising on acquisition of the Pearl businesses £m |
Total gains/ (losses) in income statement £m |
Purchases and sales £m |
Transfers from Level 1 and Level 2 £m |
At 31 December 2009 £m |
Unrealised gains/(losses) on assets held at end of year £m |
|
|---|---|---|---|---|---|---|---|
| Financial assets designated | |||||||
| at fair value through | |||||||
| profit or loss upon initial | |||||||
| recognition | |||||||
| Equities | – | 1,513 | 2 | (25) | 4 | 1,494 | 29 |
| Fixed and variable rate | |||||||
| income securities | – | 839 | (18) | 80 | (82) | 819 | (18) |
| Collective investment schemes | – | 259 | 40 | (64) | – | 235 | 37 |
| – | 2,611 | 24 | (9) | (78) | 2,548 | 48 |
(continued)
| At 1 January 2009 £m |
Arising on acquisition of the Pearl businesses £m |
Total gains in income statement £m |
Purchases and sales £m |
Transfers from Level 1 and Level 2 £m |
At 31 December 2009 £m |
Unrealised gains on liabilities held at end of year £m |
|
|---|---|---|---|---|---|---|---|
| Financial liabilities designated at fair value through profit or loss upon initial recognition |
|||||||
| Net asset value attributable to unitholders |
– | 170 | 8 | (24) | – | 154 | 29 |
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.
The Group lends listed financial assets held in its investment portfolio to other institutions. The Group conducts its stock lending programme only with well-established, reputable institutions in accordance with established market conventions.
The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights. The carrying value of listed financial assets lent at 31 December 2009 that have not been derecognised amounted to £8,612 million (2008: £nil).
It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable securities. Certain cash collateral is available to the Group for investment purposes and is therefore recognised as a financial asset and a financial liability. The amount recognised as a financial assets and a financial liability at 31 December 2009 is £2,780 million (2008: £nil) and £3,007 million (2008: £nil) respectively. Other collateral is held on behalf of the Group and is not recognised in the statement of consolidated financial position as the Group is not permitted to sell or re-pledge the collateral in the absence of default.
The reinvested assets are primarily AAA listed securities and cash and the Group also has other readily realisable financial assets which are available to settle the collateral liabilities if required.
| 2009 £m |
2008 £m |
|
|---|---|---|
| Unsettled trades | 550 | – |
| Other debtors | 231 | – |
| 781 | – | |
| Amount recoverable after 12 months | – | – |
| 2009 £m |
2008 £m |
|
|---|---|---|
| Bank and cash balances | 2,223 | 2 |
| Short-term deposits (including demand and time deposits) | 3,858 | – |
| 6,081 | 2 |
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long term business operations and collective investment schemes of £5,551 million (2008: £nil) are primarily held for the benefit of policyholders and so are generally not available for use by the owners.
40.1 Cash flows from operating activities
| Restated Period |
||
|---|---|---|
| 2009 | ended 31 December 2008 |
|
| £m | £m | |
| Profit for the year before tax | 91 | 31 |
| Non-cash movements in profit for the year before tax | ||
| Fair value (gains)/losses on: | ||
| Investment property | (159) | – |
| Financial assets | 354 | – |
| Unrealised (losses)/gains on: | ||
| Financial liabilities | – | (17) |
| Borrowings | 32 | – |
| Depreciation of property, plant and equipment | 2 | – |
| Amortisation of intangible assets | 57 | – |
| Change in present value of future profit | (4) | – |
| Change in unallocated surplus | 175 | – |
| Change in deposit received from reinsurers | (25) | – |
| Interest income on trust account | (2) | (16) |
| Share-based payment charge | 5 | 2 |
| Interest expense on borrowings | 87 | – |
| Net expected return on pension assets | 9 | – |
| Foreign currency exchange gains | (1) | – |
| Decrease in investment assets | 487 | – |
| Increase in reinsurance assets | (160) | – |
| Decrease in insurance contract and investment contract liabilities | (951) | – |
| Net increase in working capital | (354) | – |
| Cash absorbed by operations | (357) | – |
40.2 Cash flows on acquisition of the Pearl businesses
| Period | ||
|---|---|---|
| 2009 £m |
ended 31 December 2008 £m |
|
| Consideration settled in cash | – | – |
| Acquisition expenses | 9 | – |
| 9 | – | |
| Cash and cash equivalents of the Pearl businesses | (6,155) | – |
| (6,146) | – |
(continued)
The trust account was held at Goldman Sachs, International, London branch and consisted of the net proceeds of the IPO, the proceeds of the sale of the Founders' units sold to the Founders prior to the consummation of the IPO, the proceeds of the sale of the Sponsors' warrants and £9 million of the underwriting fee that the underwriters had agreed to defer until the consummation of a business combination. Release of this amount was not at the discretion of the Company. The amounts held in the trust account were only to be released to the Company upon the consummation of a business combination, as set forth in the offering circular dated 25 January 2008 and the supplement thereto dated 5 February 2008. The trust account was under supervision of the Trustee under the trust agreement. Following the acquisition of the Pearl businesses, £45 million was returned from the Trust Account to subscribers for IPO shares who did not vote in favour of the business combination comprising £41 million share premium and £4 million accrued interest. The remainder of the trust account was transferred to the Company.
The Group's Capital Management Framework is designed to achieve the following objectives:
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.
The capital policy of each Group holding company is set by the Board of Phoenix Group Holdings and monitored each month at both the executive and Board level. The policies ensure sufficient liquidity to meet creditor and dividend obligations through the combination of cash buffers and cash flows from the Group's operating companies. Volatility in the latter is monitored at the executive and Board level through stress and scenario testing. Where cash flow volatility is judged to be in excess of the Board's risk appetite, de-risking activities are undertaken.
The capital policy of each life company is set by each life company Board and monitored on a daily basis. These policies ensure there is sufficient capital within each life company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each life company varies according to the risk profile and financial strength of the company.
Each UK life company must retain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA. In addition to EU-directive-based 'Pillar 1' and group capital requirements, the FSA has also stipulated a 'Pillar 2' of risk-based capital requirements that have been implemented in the UK. A life company's actual capital requirement is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company. Each life company generally holds an amount of capital that is greater than the minimum required amount to allow for adverse events in the future that may use capital and might otherwise cause the company to fail the minimum level of regulatory capital test.
With the exception of with profit businesses, the regulatory capital requirement under Pillar 1 is the total amount held in respect of investment, expense and insurance risks (the 'long-term insurance capital requirement' ("LTICR")) and any additional amounts required to cover the more onerous of two specified stress tests (the 'resilience capital requirement' ("RCR")). The regulatory capital requirement is then deducted from the available capital resources to give the excess capital on a regulatory basis
A further test is required under Pillar 1 in respect of with profit funds which may result in an additional capital requirement referred to as the 'with profit insurance capital component' ("WPICC").
The Pillar 2 capital requirements are based on a self-assessment methodology, the so called Individual Capital Assessment ("ICA"). This methodology determines the capital requirement to ensure that the life company's realistic liabilities can be met in one year's time with a 99.5% confidence level, or in other words to be able to withstand a 1 in 200 year event. The FSA reviews each life company's ICA and may impose additional capital requirements if necessary in the form of Individual Capital Guidance ("ICG").
FSA regulated insurance groups (including their holding companies) are also required to provide an assessment of capital adequacy on a Group-wide basis to enable the FSA to assess both the level of insurance and financial risk within the Group and the capital resources available to cover that risk. The assessment is known as the IGD and is the Group's primary capital and solvency measure.
The Group's IGD assessment is made at the highest EEA level insurance Group holding company, which is PLHL. PLHL is a subsidiary of the Company.
The purpose of the capital position statement is to set out the capital resources of the Phoenix Life segment of the Group and to provide an analysis of the disposition and constraints over the availability of capital to meet risks and regulatory requirements. The capital position statement also provides a reconciliation of owners' funds to regulatory capital and an analysis of the regulatory capital between the Group's with profit funds, non participating business, life business owners' funds and its other activities.
The Group acquired its life assurance business upon the purchase of the Pearl businesses, information on which is given in note 3. The Group's material with profit funds at 31 December 2009 are shown separately in the capital position statement and the less material with profit funds are aggregated and shown as 'Other'. The with profit funds shown separately are the Phoenix with profit fund ("PLL PWP"), the Britannic with profit fund ("PLL BWP"), the SMA with profit fund ("SMA WPF"), the Scottish Provident with profit fund ("SPL WPF") and the Pearl with profit fund ("Pearl WPF"). The with profit funds of London Life Limited and Phoenix & London Assurance Limited ("PALAL") are aggregated within the 'Other' column.
The contributions made by Phoenix Pensions Limited ("PPL") and NPLL to the Group's capital resources are included in the column headed 'Phoenix Life owners' funds', since they are owned by the Group's life business owners' funds. An allocation of capital and loans from the Phoenix Life owners' funds to the Group's non participating business is made in respect of PPL and to the Pearl WPF in respect of NPLL representing capital resources to cover the capital resources requirement of the PPL and NPLL long-term funds respectively. The non participating business and other activities are shown in aggregate in the capital position statement. Virtually all activities of the Group relate to UK business.
The Group has a number of internal loan arrangements in place, which allow the Group to provide capital support to other areas of the business. In addition to these internal loan arrangements, the Group has in place a number of internal reinsurance contracts which are structured to manage the capital position between certain life funds.
The available capital resources in each part of the business are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group. The principal restrictions are:
With profit funds – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to policyholders and owners. In 90:10 with profit funds, policyholders are entitled to at least 90% of the distributed profits while owners receive the balance. In 100:0 with profit funds, policyholders are entitled to 100% of the distributed profits. Any distribution to the owners would be subject to a tax charge which, for some funds, would be deducted from the amount received by owners.
Non participating funds – any available surplus held in these funds is attributable to owners. Capital within the non participating funds may be made available to meet capital requirements elsewhere in the Group subject to meeting regulatory and legal requirements, and after consideration of the internal capital requirements of the relevant fund and company. Any transfer of surplus may give rise to a tax charge subject to availability of tax relief elsewhere in the Group.
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.
(continued)
The capital statement and movement analysis that follows presents information about the capital resources for the Group's UK life businesses.
| Other | ||||||
|---|---|---|---|---|---|---|
| With profit | Non | Phoenix Life | Total Phoenix | activities and consolidation |
Group | |
| 2009 | (see below) £m |
participating £m |
owners' funds £m |
Life business £m |
adjustments4 £m |
total £m |
| Owners' funds held outside long-term fund | – | – | 2,475 | 2,475 | (1,955) | 520 |
| Owners' funds held in long-term fund | – | 902 | (10) | 892 | – | 892 |
| Total owners' funds at 31 December 2009 | – | 902 | 2,465 | 3,367 | (1,955) | 1,412 |
| Adjustments onto a regulatory basis: | ||||||
| Unallocated surplus | 710 | – | 11 | 721 | ||
| Adjustments to assets1 | (64) | (298) | (810) | (1,172) | ||
| Adjustments to liabilities2 | 3,237 | (87) | 40 | 3,190 | ||
| Valuation difference between IFRS basis | ||||||
| and regulatory basis | – | 91 | (8) | 83 | ||
| Other qualifying capital: | ||||||
| Subordinated debt3 | 83 | – | 637 | 720 | ||
| Contingent loans | 382 | (228) | (88) | 66 | ||
| Allocation of group capital | 122 | 206 | (328) | – | ||
| Total available capital resources | ||||||
| at 31 December 2009 | 4,470 | 586 | 1,919 | 6,975 | ||
1 Regulatory adjustments to assets reflect adjustments to derecognise inadmissible assets such as intangibles and deferred tax assets as well as those adjustments that are necessary where asset and counterparty exposures exceed the prescribed regulatory limits. 2 Regulatory adjustments to liabilities reflect the different valuation basis for insurance liabilities on a regulatory basis.
3 Of the £720 million subordinated debt attributed to the Phoenix Life segment of the Group £520 million is internal to the Group, comprising £250 million provided to Pearl and £270 million provided to PALAL. The remaining £200 million is external subordinated debt issued by PLL.
4 'Other activities and consolidation adjustments' represent the contribution to consolidated owners' funds arising outside of the Phoenix Life business. This includes the owners' funds of Ignis Asset Management and the holding companies of the Group but primarily consists of the consolidation adjustments to eliminate the cost of the Group's investment in the Phoenix Life business.
| With profits 2009 |
Pearl WPF £m |
PLL PWP £m |
PLL BWP £m |
SMA WPF £m |
SPL WPF £m |
Other £m |
Total £m |
|---|---|---|---|---|---|---|---|
| Owners' funds held outside | |||||||
| long-term fund | – | – | – | – | – | – | – |
| Owners' funds held in | |||||||
| long-term fund | – | – | – | – | – | – | – |
| Total owners' funds at | |||||||
| 31 December 2009 | – | – | – | – | – | – | – |
| Adjustments onto a | |||||||
| regulatory basis: | |||||||
| Unallocated surplus | 209 | 128 | 254 | 29 | 55 | 35 | 710 |
| Adjustments to assets | (34) | (3) | (11) | - | 1 | (17) | (64) |
| Adjustments to liabilities | 604 | 802 | 560 | 265 | 587 | 419 | 3,237 |
| Other qualifying capital: | |||||||
| Subordinated debt | 83 | – | – | – | – | – | 83 |
| Contingent loans | – | – | – | – | – | 382 | 382 |
| Allocation of Group capital | 122 | – | – | – | – | – | 122 |
| Total available capital resources | |||||||
| at 31 December 2009 | 984 | 927 | 803 | 294 | 643 | 819 | 4,470 |
An analysis of the movement in available capital resources for the period 1 January 2009 to 31 December 2009 is shown below:
| Phoenix Life With profit |
Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Pearl WPF | PLL PWP | PLL BWP | SMA WPF | SPL WPF | Other | Non participating |
owners' funds |
Phoenix Life business |
|
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Total available | |||||||||
| capital resources at | |||||||||
| 1 January 2009 | – | – | – | – | – | – | – | – | – |
| On acquisition of the | |||||||||
| Pearl businesses | 850 | 738 | 634 | 357 | 619 | 427 | 659 | 1,902 | 6,186 |
| Regular surplus | 111 | 27 | 17 | 48 | (2) | 20 | 101 | – | 322 |
| Investment return | 60 | 224 | 230 | 82 | 203 | 248 | (17) | 100 | 1,130 |
| Cost of bonus | (27) | (47) | (33) | (16) | (26) | (13) | – | 15 | (147) |
| Changes in methodology | |||||||||
| and assumptions | |||||||||
| Longevity | 1 | 26 | 1 | 18 | 15 | 32 | (4) | – | 89 |
| Expenses | – | (6) | – | (9) | 14 | (18) | 13 | – | (6) |
| Other | 1 | (13) | (2) | – | – | (7) | 21 | – | – |
| Management actions | |||||||||
| Investment strategy | – | – | – | – | – | 276 | – | – | 276 |
| Proceeds from issue of | |||||||||
| subordinated debt | – | – | – | – | – | – | – | 250 | 250 |
| Dividends paid by | |||||||||
| Phoenix Life | – | – | – | – | – | – | – | (406) | (406) |
| New business and | |||||||||
| other factors | |||||||||
| Intragroup capital movement | – | – | – | – | – | (6) | (241) | 216 | (31) |
| Valuation rate of interest | – | (72) | (7) | (126) | (160) | (142) | (2) | – | (509) |
| Adjustment for internal loans in | |||||||||
| excess of counterparty limits | – | – | – | – | – | – | – | (37) | (37) |
| Other | (12) | 50 | (37) | (60) | (20) | 2 | 56 | (121) | (142) |
| Total available | |||||||||
| capital resources at | |||||||||
| 31 December 2009 | 984 | 927 | 803 | 294 | 643 | 819 | 586 | 1,919 | 6,975 |
Changes in methodology and assumptions
Changes to capital resources arising from changes in methodology and assumptions occur in the normal course of the assumption setting process and reflect changes in available data inputs.
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 2009 generally comprise financing activities, both to strengthen the Phoenix Life segment in the form of subordinated debt, and to pay dividends to finance corporate activities. In respect of investment strategy, the improvement in capital resources has arisen from an initiative to restructure the with profit fund of PALAL to improve the outlook for policyholders of that fund.
(continued)
The Group is exposed to a number of risks in its business including those arising from underlying assets and liabilities. The Group's overall approach to risk management is described in the Performance section of the Annual Report & Accounts.
The risk management objectives and policies of the Group are based on the requirement to protect the Group's regulatory capital position, thereby safeguarding policyholders' guaranteed benefits whilst also ensuring the Group can meet various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased investment returns, balancing risk and reward, to generate additional value for policyholders and shareholders.
In pursuing these objectives, the Group deploys financial assets and incurs financial liabilities. Financial assets principally comprise investments in equity securities, fixed and variable rate income securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities comprise investment contracts, borrowings for financing purposes, derivative liabilities and other payables.
The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly, market risk, credit risk and liquidity risk.
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.
Derivatives are used in a number of the Group's funds, within policy guidelines agreed by the Board of each life company and overseen by Investment Committees of the Boards of each life company supported by management oversight committees. Derivatives are primarily used for efficient portfolio management or for risk hedging purposes.
More detail on the Group's exposure to financial risk is provided in note 42.3 below.
The Group is also exposed to insurance risk arising from its Phoenix Life segment. Life assurance risk in the Group arises through its exposure to mortality, longevity and to variances between assumed and actual experience in factors such as persistency levels and management and administrative expenses. More details on the Group's exposure to insurance risk is provided in note 42.5 below.
The Group's overall exposure to investment risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, essentially within the ALM framework that has been developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group's ALM relies on close matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with profit business, which includes all of the Group's participating business, non linked non participating business and unit linked business.
Transactions in financial instruments may result in the Group assuming financial risks. This includes credit risk, market risk and liquidity risk. Each of these are described below, together with a summary of how the Group manages them.
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. These obligations can relate to both on and off balance sheet assets and liabilities.
There are two principal sources of credit risk for the Group:
The amount disclosed in the statement of consolidated financial position in respect of all financial assets, together with rights secured under off-balance sheet collateral arrangements, and excluding those that back unit linked liabilities, represents the Group's maximum exposure to credit risk.
Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through divisional credit risk tolerances. In certain cases, protection against exposure to particular credit risk types may be achieved through use of derivatives. The credit risk borne by the shareholder on with profit policies is usually minimal unless the insurance fund is relying on shareholder support.
An indication of the Group's exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure with external credit ratings:
| 2009 | AAA £m |
AA £m |
A £m |
BBB £m |
BB £m |
B and below £m |
Non rated £m |
Unit linked £m |
Total £m |
|---|---|---|---|---|---|---|---|---|---|
| Loans and receivables | – | – | – | – | – | 1,027 | 46 | 8 | 1,081 |
| Derivatives | – | 73 | 3,368 | – | – | – | 50 | 49 | 3,540 |
| Fixed and variable rate | |||||||||
| income securities | 23,690 | 3,873 | 5,343 | 2,474 | 514 | 400 | 843 | 521 | 37,658 |
| Reinsurers' share of insurance | |||||||||
| contract liabilities | 13 | 595 | 2,124 | 20 | – | – | 98 | 10 | 2,860 |
| Cash and cash equivalents | 2,141 | 2,442 | 1,003 | 6 | – | – | 92 | 397 | 6,081 |
| B and | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2008 | AAA £m |
AA £m |
A £m |
BBB £m |
BB £m |
below £m |
Non rated £m |
Unit linked £m |
Total £m |
| Cash and cash equivalents | 2 | – | – | – | – | – | – | – | 2 |
| Amounts in trust | – | – | 591 | – | – | – | – | – | 591 |
Credit ratings have not been disclosed in the above tables for equities. Whilst the Group is exposed to the impact of credit default on its equity holdings, this risk is not considered significant due to the spread of holdings. Non-equity based derivatives are included in the credit risk table above.
Credit ratings have also not been disclosed in the above tables for holdings in collective investment schemes. The risk of loss to the Group due to credit default on its holdings in collective investment schemes is considered low due to the tradeable nature of these investments.
(continued)
It is also the Group's policy to maintain accurate and consistent internal risk ratings across its asset portfolio. This enables management to focus on the applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories of assets and are derived in accordance with the Group's rating policy. The attributable risk ratings are assessed and updated regularly.
A further indicator of the quality of the Group's financial assets is the extent to which they are neither past due nor impaired. The following table gives information regarding the ageing of financial assets that are past due but not impaired and the carrying value of financial assets that have been impaired.
| 2009 | Neither past due nor impaired £m |
Less than 30 days £m |
30–90 days £m |
Greater than 90 days £m |
Impaired £m |
Unit linked £m |
Carrying value £m |
|---|---|---|---|---|---|---|---|
| Loans and receivables | 1,073 | – | – | – | – | 8 | 1,081 |
| Derivatives | 3,491 | – | – | – | – | 49 | 3,540 |
| Fixed and variable rate income securities | 37,137 | – | – | – | – | 521 | 37,658 |
| Reinsurers' share of insurance contract liabilities | 2,850 | – | – | – | – | 10 | 2,860 |
| Reinsurance receivables | 264 | – | – | – | – | – | 264 |
| Prepayments and accrued income | 518 | 84 | – | 1 | – | 19 | 622 |
| Other receivables | 765 | 6 | 1 | 6 | 3 | – | 781 |
| Cash and cash equivalents | 5,684 | – | – | – | – | 397 | 6,081 |
| Neither past | Less | Greater | |||||
|---|---|---|---|---|---|---|---|
| due nor | than | than | Carrying | ||||
| impaired | 30 days | 30–90 days | 90 days | Impaired | Unit linked | value | |
| 2008 | £m | £m | £m | £m | £m | £m | £m |
| Cash and cash equivalents | 2 | – | – | – | – | – | 2 |
| Amounts in trust | 591 | – | – | – | – | – | 591 |
Assets backing unit linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders. However, these assets have been included as a separate column in these tables to reconcile the information to the primary financial statements. Shareholder credit exposure on unit linked assets is limited to the level of asset manager fee which is dependent on the underlying assets. In certain circumstances the shareholder funds may be used to re-establish unit linked assets in line with regulatory and policyholder expectations.
Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained within the investment guidelines and investment management agreements, overlaid by regulatory requirements.
The Group is also exposed to concentration risk with outsourced service providers. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees and measured though the ICA stress and scenario testing.
The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained for securities lending, certain reinsurance arrangements and to provide security against the maturity proceeds of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed and performs an impairment valuation when impairment indicators exist and the asset is not fully secured.
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises interest risk, currency risk and other price risk.
The Group is mainly exposed to market risk as a result of:
The Group manages the levels of market risk that it accepts through an approach to investment management that determines:
All operations comply with regulatory requirements relating to the taking of market risk.
Interest risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates due to the effect such movements have on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance.
Interest risk is managed by matching assets and liabilities where practicable and by entering into swap arrangements where appropriate. This is particularly the case for the non participating funds. For participating business, some element of investment mismatching is permitted where it is consistent with the principles of Treating Customers Fairly. The with profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.
The sensitivity analysis for interest risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest rates on all assets and liabilities that contribute to the Group's reported profit after tax and equity.
With profit business and non profit business within the with profit funds are exposed to interest risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest stocks and derivatives. For with profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits. The contribution of these funds to the Group result is determined primarily by either the shareholders' share of the declared annual bonus or by the shareholders' interest in any change in value in the capital advanced to the Group's with profit funds.
In the non participating funds, policy liabilities are duration matched with primarily fixed interest securities, with the result that sensitivity to changes in interest rates is very low.
(continued)
An increase of 1% in interest rates, with all other variables held constant, would result in decreases in the profit after tax in respect of a full financial year and in equity of £61 million (2008: £nil). A decrease of 1% in interest rates, with all other variables held constant, would result in an additional profit after tax in respect of a full financial year and an increase in equity of £89 million (2008: £nil).
The Group's price risk exposure relates to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.
The portfolio of marketable equity securities, and property investments, which is carried in the statement of consolidated financial position at fair value, has exposure to price risk. The Group's objective in holding these assets is to earn higher long-term returns by investing in a diverse portfolio of high quality equities and properties. Portfolio characteristics are analysed regularly and price risks are actively managed in line with investment mandates. The Group's holdings are diversified across industries, and concentrations in any one company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held in with profit or unit linked funds. For unit linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with profit funds policyholders' future bonuses will be impacted by the investment returns achieved and hence the price risk. In addition some equity investments are held in respect of equity holders' funds. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds.
Equity and property price risk is managed through the agreement and monitoring of financial risk profiles that are appropriate for each of the Group's life funds in respect of maintaining adequate regulatory capital and Treating Customers Fairly. This is largely achieved through asset class diversification.
The impact of non government fixed interest securities and, inter alia, the change in market credit spreads during the year are fully reflected in the values shown in these financial statements. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap spreads.
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.
A 10% decrease in equity/property prices, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year and in equity of £17 million (2008: £nil).
A 10% increase in equity/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 £13 million (2008: £nil).
There is also an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with profit funds, unit linked funds, non profit funds (where risks and rewards fall wholly to shareholders) and in shareholders' funds.
A 100 basis point widening of credit spreads, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full financial year and in equity of £196 million (2008: £nil).
A 100 basis point narrowing of credit spreads, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year and in equity of £216 million (2008: £nil).
The Group's principal transactions are carried out in sterling and therefore its exchange risk is limited principally to foreign operations.
The Group's foreign operations (taken to be those denominated in non-sterling) generally invest in assets in the same
currency denomination as their liabilities, so foreign currency mismatch risk between assets and liabilities is largely mitigated. Consequently, the foreign currency risk from the foreign operations mainly arises when the assets and liabilities denominated in a foreign currency are translated into sterling.
The Group's financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the earnings of UK companies arising abroad.
Certain Phoenix Life with profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the Investment Committees of the Boards of each life company. Fluctuations in exchange rates from holdings in overseas assets are hedged against currency risks.
Sensitivity of profit after tax and in equity to fluctuations in currency exchange rates is not considered significant at 31 December 2009, since unhedged exposure to foreign currency was relatively low.
Liquidity risk is defined as the failure of the Group to maintain adequate levels of financial resources to enable it to meet its obligations as they fall due. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group's subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short term cash flow requirements.
The Board of Phoenix Group Holdings has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that:
The Group's policy is to maintain sufficient liquid assets of suitable credit quality at all times and, where appropriate, to have access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term allowing management to respond appropriately to changes in circumstances.
Some of the Group's commercial property investments are held through a unit trust managed by Ignis Asset Management. This unit trust has the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the unit trust has continued to process both investments and realisations in a normal manner and has not imposed any restrictions or delays.
(continued)
The following table provides a maturity analysis showing the remaining contractual maturities of the Group's undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4:
| 1 year or less | Greater than | No fixed | |||
|---|---|---|---|---|---|
| 2009 | or on demand £m |
1–5 years £m |
5 years £m |
term £m |
Total £m |
| Liabilities under insurance contracts | 10,141 | 14,539 | 23,748 | 1,863 | 50,291 |
| Investment contracts | 8,570 | – | – | – | 8,570 |
| Borrowings | 95 | 2,447 | 1,950 | 258 | 4,750 |
| Deposits received from reinsurers | 38 | 138 | 522 | – | 698 |
| Derivatives | 1,448 | 363 | 1,511 | – | 3,322 |
| Net asset value attributable to | |||||
| unit holders | 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 |
| Other payables | 325 | 8 | – | 317 | 650 |
| 2008 | 1 year or less or on demand £m |
1–5 years £m |
Greater than 5 years £m |
No fixed term £m |
Total £m |
|---|---|---|---|---|---|
| Accruals and deferred income | 9 | – | – | – | 9 |
Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out within one year of the reporting date.
A significant proportion of the Group's financial assets are held in gilts, cash, supranationals and highly rated securities which the Group considers sufficient to meet the liabilities as they fall due.
For unit linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are based. There is therefore no interest, price, currency or credit risk for the Group on these contracts.
In extreme circumstances, the Group could be exposed to liquidity risk in its unit linked funds. This could occur where a high volume of surrenders coincides with a tightening of liquidity in a unit linked fund to the point where assets of that fund have to be sold to meet those withdrawals. Where the fund affected consists of property, it can take several months to complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of all investors in those funds and to protect the Group's own risk exposure.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The Phoenix Life segment contracts include the following sources of insurance risk:
| Mortality | – Higher than expected number of death claims on assurance products and occurrence of one or more large claims; |
|---|---|
| Longevity | – Faster than expected improvements in life expectancy on immediate and deferred annuity products; |
| Morbidity | – Higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies; |
| Expenses | – Policies cost more to administer than expected; |
| Lapses | – The numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; and |
| Options | – Unanticipated changes in policyholder option exercise rates giving rise to increased claims costs. |
The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing.
The profitability of the run-off of the closed long-term insurance businesses within the Group depends to a significant extent on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial principles by reference to assumptions about the development of financial and insurance risks.
It is therefore necessary for the Boards of each life company to make decisions, based on actuarial advice, which ensure an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and, where discretion exists, the level of payments on early termination.
Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix, or future bonus rates. The most significant non-economic sensitivities arise from mortality, longevity and lapse risk.
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £27 million (2008: £nil).
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year and a decrease in shareholders' equity of £27 million (2008: £nil).
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £91 million (2008: £nil).
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year and a decrease in equity of £83 million (2008: £nil).
A decrease of 25% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year and a decrease in equity of £50 million (2008: £nil).
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year and an increase in equity of £41 million (2008: £nil).
(continued)
For participating business, which is with profit business (insurance and investment contracts), the insurance contract liability is calculated in accordance with the FSA's realistic capital regime, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability as required by FRS 27 'Life Assurance'. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
Valuation of non participating insurance contracts
The non participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.
For participating business in realistic basis companies the assumptions about future demographic trends are intended to be "best estimates". They are determined after considering the companies' recent experience and/or relevant industry data. Economic assumptions are market consistent.
For other business, demographic assumptions are derived by adding a prudent margin to best estimate assumptions. Economic assumptions are prudent estimates of the returns expected to be achieved on the assets backing the liabilities.
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across the enlarged Group. The impact of material changes during the year were as follows:
| Increase/ | Increase/ | |
|---|---|---|
| (decrease) | (decrease) | |
| in insurance | in insurance | |
| liabilities 2009 | liabilities 2008 | |
| £m | £m | |
| Change in longevity assumptions | (73) | – |
| Change in persistency assumptions | 94 | – |
For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk-neutral scenarios produced by an economic scenario generator calibrated to market conditions and gilt yields as at the valuation date.
For funds not subject to realistic reporting, the method used to determine valuation interest rates generally follows the regulations set out in the Prudential Sourcebook for Insurers.
Assets are firstly hypothecated to classes of business being valued. The valuation interest rates for each block of business are based on the expected returns of the hypothecated assets. The yield is then adjusted to make allowance for credit risk, liquidity risk, reinvestment risk and investment management expenses.
Valuation interest rates (after tax for life policies) are typically in the following ranges:
| 2009 | 2008 | |
|---|---|---|
| % | % | |
| Life policies | 2.14 – 3.82 | – |
| Pension policies | 2.76 – 4.84 | – |
Expenses are assumed to increase at the rate of increase in the Retail Price Index ("RPI") plus fixed margins in accordance with the various Management Service Agreements ("MSAs") the Group has in place with outsourced service providers. For with profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
Mortality rates are based on published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.
The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation of with profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.
For realistic basis companies, the regular bonus rates assumed in each scenario are determined in accordance with each company's PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM.
Some of the Group's products give potentially valuable guarantees, or give options to change policy benefits which can be exercised at the policyholders' discretion. These products are described below.
Most with profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates. For pensions' contracts, the specified date is the policyholder's chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with profit contracts usually increase the guaranteed amount.
There are guaranteed surrender values on a small number of older contracts.
Some pensions' contracts include guaranteed annuity options which (see deferred annuities in section 42.5.2 for details). The total amount provided in the with profit and non profit funds in respect of the future costs of guaranteed annuity options are £1,469 million (2008: £nil) and £52 million (2008: £nil) respectively.
In common with other life companies in the UK that have written pension transfer and opt-out business, the Group has set up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts. The total amount provided in the with profit funds and non profit funds in respect of the review and possible redress relating to pension policies, including associated costs, are £325 million (2008: £nil) and £46 million (2008: £nil) respectively.
(continued)
With profit deferred annuities participate in profits only up to the date of retirement. At retirement, a Guaranteed Cash Option ("GCO") allows the policyholder to commute the annuity benefit into cash on guaranteed terms.
The following sections give an assessment of the risks associated with the Group's main life assurance products and the ways in which the Group manages those risks.
| 2009 | 2009 | ||||
|---|---|---|---|---|---|
| Gross | Reinsurance | ||||
| Insurance contracts |
Investment contracts with DPF |
Insurance contracts |
Investment contracts with DPF |
||
| £m | £m | £m | £m | ||
| With profit funds: | |||||
| Pensions | |||||
| Deferred annuities – with guarantees | 8,821 | 73 | 392 | – | |
| Deferred annuities – without guarantees | 1,550 | 112 | – | – | |
| Immediate annuities | 3,679 | – | 671 | – | |
| Unitised with profit | 1,279 | 9,051 | 90 | – | |
| Total pensions | 15,329 | 9,236 | 1,153 | – | |
| Life | |||||
| Immediate annuities | 74 | – | 7 | – | |
| Unitised with profit | 1,398 | 601 | 40 | – | |
| Life with profit | 7,725 | – | 12 | – | |
| Total life | 9,197 | 601 | 59 | – | |
| Other | 2,290 | 6 | 92 | – | |
| Non profit funds | |||||
| Deferred annuities – with guarantees | 117 | – | 59 | – | |
| Deferred annuities – without guarantees | 1,012 | 5 | 474 | – | |
| Immediate annuities | 8,073 | – | 704 | – | |
| Protection | 610 | – | 290 | – | |
| Unit linked | 1,888 | 1,423 | 13 | – | |
| Other | 449 | 55 | 16 | – | |
| 38,965 | 11,326 | 2,860 | – |
With profit Fund (Unitised and Traditional)
The Group operates a number of with profit funds in the UK in which the with profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non profit business is also written in some of the with profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates ("GAR").
The investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with profit funds is set out in the PPFM for each with profit fund and is overseen by with profit committees. Advice is also taken from the with profit actuary of each company which has a with profit fund. Compliance with the PPFM is reviewed annually and reported to the FSA and policyholders.
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others.
Unitised and traditional with profit policies are exposed to equivalent risks, the main difference being that unitised with profit policies purchase notional units in a with profit fund whereas traditional with profit policies do not. Benefit payments for unitised policies are then dependent on unit prices at the time of a claim, although charges may be applied. A unitised with profit fund price is typically guaranteed not to fall and increases in line with any discretionary bonus payments over the course of one year.
Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as GCO policies.
During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than originally anticipated. Deferred annuity policies which are written to provide annuity benefits are managed in a similar manner to immediate annuities and are exposed to the same risks.
The guaranteed terms on GAR policies are more favourable than the annuity rates currently available in the market available for cash benefits. The guaranteed terms on GCO policies are currently not valuable.
The option provisions on GAR policies are particularly sensitive to downward movements in interest rates, increasing life expectancy and the proportion of customers exercising their option. Adverse movements in these factors could lead to a requirement to increase reserves which could adversely impact profit and potentially require additional capital. In order to address the interest rate risk (but not the risk of increasing life expectancy or changing customer behaviour with regard to exercise of the option), insurance subsidiaries within the Group have purchased derivatives that provide protection against an increase in liabilities and have thus reduced the sensitivity of profit to movements in interest rates.
The Group seeks to manage this risk in accordance with both the terms of the issued policies and the interests of customers, and has obtained external advice supporting the manner in which it operates the long-term funds in this respect.
This type of annuity is purchased with a single premium at the outset, and is paid to the policyholder for the remainder of their lifetime. Payments may also continue for the benefit of a surviving spouse or partner after the annuitant's death. Annuities may be level, or escalate at a fixed rate, or may escalate in line with a price index and may be payable for a minimum period irrespective of whether the policyholder remains alive.
The main risks associated with this product are longevity and investment risks. Longevity risk arises where the annuities are paid for the lifetime of the policyholder, and is managed through the initial pricing of the annuity and through reinsurance (appropriately collateralised) or transfer of existing liabilities. Annuities may also be a partial 'natural hedge' against losses incurred in protection business in the event of increased mortality (and vice versa) although the extent to which this occurs will depend on the similarity of the demographic profile of each book of business.
The pricing assumption for mortality risk is based on both historic internal information and externally generated information on mortality experience, including allowances for future mortality improvements. Pricing will also include a contingency margin for adverse deviations in assumptions.
Investment risk depends on the extent to which the annuity payments under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.
These contracts are typically secured by the payment of a regular premium payable for a period of years providing benefits payable on certain events occurring within the period. The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness.
The main risk associated with this product is the claims experience and this risk is managed through the initial pricing of the policy (based on actuarial principles), the use of reinsurance and a clear process for administering claims.
(continued)
Operating lease rentals charged within administrative expenses amounted to £15 million (2008: £nil).
The Group has commitments under non-cancellable operating leases as set out below:
| 2009 £m |
2008 £m |
|
|---|---|---|
| Not later than 1 year | 11 | – |
| Later than 1 year and no later than 5 years | 42 | – |
| Later than 5 years | 54 | – |
The principal operating lease commitments primarily concern office space located at Bothwell Street, Glasgow; St Vincent Street, Glasgow; Juxon House, London and Harcourt Street, London.
| 2009 £m |
2008 £m |
|
|---|---|---|
| To subscribe to private equity funds and other unlisted assets | 520 | – |
| To purchase, construct or develop investment property | 108 | – |
| For repairs, maintenance or enhancements of investment property | 3 | – |
The Group has related party transactions with its pension schemes, its Directors and entities where its Directors are deemed to have significant influence.
During the year the Group entered into the following transactions with its pension schemes:
| Transactions 2009 £m |
Balances outstanding 2009 £m |
|
|---|---|---|
| Pearl Scheme | ||
| Investment management fees | 1.4 | 1.4 |
| Payment of administrative expenses | (1.0) | (0.3) |
| 0.4 | 1.1 | |
| PGL Scheme | ||
| Investment management fees | 0.7 | 0.5 |
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2009 the Pearl Scheme held 1,118,197 units in the Axial Systematic Strategies Fund and 115,477,491 units in the Ignis Liquidity Fund. The value of these investments at 31 December 2009 was £154 million (2008: £nil) and £115 million (2008: £nil) respectively.
Other transactions and transactions with Directors and former Directors
Major Group decisions are made by the Board. Total remunerations received by current Directors in the year ended 31 December 2009 totalled £2.4 million (2008: £nil). Further details are given in the Remuneration Report.
On 4 January 2008, the one ordinary share issued at formation was transferred to Berggruen Acquisition Holdings Limited (an affiliate of Berggruen Acquisition Holdings II Ltd) and one additional ordinary share was issued to Marlin Equities IV, LLC. These two shares were subsequently repurchased by the Company on 11 January 2008.
Nicholas Berggruen is the President of Berggruen Acquisition Holdings II Ltd and Martin Franklin is the majority owner and managing member of Marlin Equities IV, LLC. The interests of these former Directors in the ordinary shares of the Company represent the interests of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC respectively. On 9 January 2008, each of Berggruen Acquisition Holdings II Ltd, Marlin Equities IV, LLC, and the Company's three initial independent Directors, Dimitri Goulandris, Guy Naggar and Miguel Pais do Amaral (collectively, the "Founders") issued a non-interestbearing note in favour of the Company for the purchase price of the Founders' ordinary shares ("Founders' shares") and warrants ("Founders' warrants") in the aggregate amount of €25,000. These notes were repaid by the Founders on 28 January 2008. On 10 January 2008, 20,125,000 units (each unit consisting of one Founders' share and one Founders' warrant and together referred to herein as a "Founders' unit") were issued as follows:
| Units | Subscription price € |
|
|---|---|---|
| Berggruen Acquisition Holdings II Ltd | 9,934,505 | 12,341 |
| Marlin Equities IV, LLC | 9,934,505 | 12,341 |
| Dimitri Goulandris | 85,330 | 106 |
| Guy Naggar | 85,330 | 106 |
| Miguel Pais do Amaral | 85,330 | 106 |
| Total | 20,125,000 | 25,000 |
On 11 January 2008, each of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC agreed to invest €4.0 million (€8.0 million in the aggregate) in the Company in the form of Sponsors' warrants to purchase 4,000,000 shares (8,000,000 in the aggregate) at a price of €1.00 per warrant. Each of Berggruen Acquisition Holdings II Limited and Marlin Equities IV, LLC purchased such Sponsors' warrants from the Company immediately prior to the consummation of the IPO on 13 February 2008.
On 11 January 2008, each of Berggruen Acquisition Holdings II Ltd and Marlin Equities IV, LLC agreed to invest €25.0 million and Mr Naggar agreed to invest €10.0 million (€60.0 million in the aggregate) in the Company in the form of co-investment units at a price of €10.00 per unit immediately prior to the consummation of a business combination. In connection with the business combination the co-investment rights were cancelled.
On or about 5 February 2008, in connection with the pricing of the IPO, the Company repurchased an aggregate of 2,875,000 of the Founders' units as follows:
| Subscription price |
||
|---|---|---|
| Units | € | |
| Berggruen Acquisition Holdings II Ltd | 1,419,215 | 1,760 |
| Marlin Equities IV, LLC | 1,419,215 | 1,760 |
| Dimitri Goulandris | 12,190 | 15 |
| Guy Naggar | 12,190 | 15 |
| Miguel Pais do Amaral | 12,190 | 15 |
| Total | 2,875,000 | 3,565 |
On 11 March 2008, as a result of the expiration without exercise of the underwriters over allotment option in connection with the IPO, Founders' units were automatically redeemed as follows:
| Units |
|---|
| 1,110,690 |
| 1,110,690 |
| 9,540 |
| 9,540 |
| 9,540 |
| 2,250,000 |
(continued)
On 29 October 2008, Guy Naggar resigned from the Board of Directors and agreed to forfeit his Founders' shares and Founders' warrants, which forfeiture was effected by the Company's repurchase of his Founders' shares at par value (and the concurrent cancellation of his Founders' warrants) upon the approval by the Company's owners and the Company's consummation of a business combination. On 29 October 2008, the Company's Board of Directors appointed Ashley Silverton to fill the vacancy on the Board of Directors. The Company paid Ashley Silverton €10,000 as compensation for his agreeing to fill this vacancy and agreed to pay Ashley Silverton a fee in the amount of €636,000 upon the consummation of a business combination. In connection with his appointment to the Board of Directors, Ashley Silverton resigned his position as vice president of the Company. The fee of €636,000 was paid to Ashley Silverton on 2 September 2009.
Prior to the IPO, the Company agreed to pay Berggruen Holdings Ltd, an affiliate of Nicholas Berggruen, a total of €10,000 per month commencing on the date of the IPO for certain operating services and support until the earlier of the Company's consummation of a business combination or its liquidation. This arrangement with Berggruen Holdings Ltd was agreed to by Berggruen Holdings Ltd for the Company's benefit and was not intended to provide Berggruen Holdings Ltd compensation in lieu of a management fee. The Company believes that such fees are at least as favourable as it could have obtained from an unaffiliated third party. Prior to the IPO, Berggruen Holdings Ltd provided the Company with certain operating services and support at no charge. This fee ceased on the acquisition of the Pearl businesses and €80,000 was charged in 2009. No amounts were outstanding at 31 December 2009.
Other than part of the €10,000 per month for operating services and support payable to Berggruen Holdings Limited and a €1,000 per month fee payable to Ashley Silverton for his services as an officer of the Company, the €10,000 payment to Ashley Silverton for his agreeing to fill the vacancy on the Board of Directors following Guy Naggar's resignation, the €636,000 fee payable to Ashley Silverton upon the consummation of a business combination and reimbursable out-of-pocket expenses payable to the Company's officers and Directors, no compensation or fees of any kind, including finders and consulting fees, have been or will be paid to the Company's officers or its Directors who owned the Company's shares prior to the IPO, or to any of their respective affiliates for services rendered to the Company prior to or in connection with a business combination.
On 27 June 2009, the Company entered into a contingent subscription agreement with Berggruen Acquisition Holdings II Ltd and Marlin Equities, IV, LLC where by the Company agreed to grant to them or their nominees the right to receive 1,000,000 'B' ordinary shares in exchange for Berggruen Acquisition Holdings II Ltd and Marlin Equities, IV, LLC agreeing to subscribe for new shares to a maximum value of £75 million, should the available cash in the Company fall below £450 million on the acquisition of the Pearl businesses. These will be issued if the share price of the company exceeds €15.00 for 20 consecutive trading days.
On 2 September 2009, in connection with the acquisition of the Pearl businesses, the Company repurchased the Founders' shares from Guy Naggar and concurrently cancelled the related Founders' warrants.
On the same date, 50% of the remaining Founders' warrants were converted into ordinary shares as follows:
| Number of | ||
|---|---|---|
| Units | ordinary shares | |
| Berggruen Acquisition Holdings II Ltd | 3,702,300 | 357,122 |
| Marlin Equities, IV, LLC | 3,702,300 | 357,122 |
| Dimitri Goulandris | 31,800 | 3,067 |
| Miguel Pais do Amaral | 31,800 | 3,067 |
| Total | 7,468,200 | 720,378 |
Also on 2 September 2009, 50% of the Sponsors warrants' were converted into ordinary shares as follows:
| Number of | ||
|---|---|---|
| Units | ordinary shares | |
| Berggruen Acquisition Holdings II Ltd | 2,000,000 | 192,919 |
| Marlin Equities, IV, LLC | 2,000,000 | 192,919 |
| Total | 4,000,000 | 385,838 |
During the year the Group has been charged a transitional services fee of £0.4 million from TDR Capital LLP, a company in which Manjit Dale is deemed to have significant influence. This amount was outstanding at 31 December 2009.
As a result of the acquisition of the Pearl businesses, TDR Capital Nominees Limited (as nominee for TDR Capital I and other related entities) received 13,014,055 'B' ordinary shares and 10,871,095 contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies. TDR Capital Nominees Limited is a subsidiary of TDR Capital LLP.
The Group is party to an uncollateralised total return swap with TDR Capital Nominees Limited in relation to the performance of certain investments of Axial Income Opportunities S.a.r.l. As at 31 December 2009 a fair value of £27.1 million (2008: £nil) has been attributed to these swaps and interest of £1.4 million (2008: £nil) has been charged by TDR Capital Nominees Limited. At 31 December 2009, interest of £0.3 million was outstanding (2008: £nil).
As a result of the acquisition of the Pearl businesses the Jambright Limited group of companies, a group in which Manjit Dale is deemed to have significant influence, received 4,506,268 'B' ordinary shares in Phoenix Group Holdings in exchange for shares it held in the acquired group of companies.
During the year the Group has also been charged a transitional services fee of £0.1 million and investment management fees of £0.4 million from Sun Capital Partners Limited, a company in which Hugh Osmond is deemed to have significant influence. The transitional services fee was outstanding at 31 December 2009.
During the year an associate of the Group, Sant Topco Holdings I S.a.r.l has been charged a financial consulting fee of €0.1 million by Sun Capital Partners Limited.
As a result of the acquisition of the Pearl businesses O-Re Holdings (Netherlands) BV, a company in which Manjit Dale and Hugh Osmond are deemed to have significant influence, received 2,481,064 'B' ordinary shares and 2,198,970 contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies.
As a result of the acquisition of the Pearl businesses the Xercise Limited group of companies, a group in which Hugh Osmond is deemed to have significant influence, received 14,108,205 'B' ordinary shares and 9,180,660 contingent rights over shares in Phoenix Group Holdings in exchange for shares it held in the acquired group of companies.
As a result of the acquisition of the Pearl businesses, some of the Directors received shares and contingent rights over shares in Phoenix Group Holdings in exchange for shares they held in the acquired group of companies. Details of the shareholdings of Directors are provided in the Remuneration Report.
In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration, and as at the period end, the Group has a contingent liability in this regard.
Following a previous acquisition by the Pearl businesses, the shares in PLL and certain loans were transferred from the non profit fund to the shareholder fund of PA (GI) Limited at their admissible regulatory value. HM Revenue & Customs ("HMRC") has challenged the tax treatment of these transfers in the year ended 31 December 2004 and litigation may follow in 2010. The Directors do not consider it probable that any additional tax liability will arise. However, were HMRC's challenge to be successful, the Group expects that the liability (before interest and penalties) should not exceed £45 million.
London Life Limited, has provided information to the FSA on its categorisation of £54 million of working capital to owner funds in 2006. The Directors are confident in this treatment, which is supported by legal and actuarial advice, but note that the FSA have not concluded their review into the matter and therefore a contingent liability of £54 million exists if London Life Limited were required to transfer this working capital back to policyholder funds.
(continued)
The principal subsidiary undertakings of the Group are as follows:
| Country of incorporation and principal place of operation |
Class of shares held (wholly-owned unless otherwise indicated) |
|
|---|---|---|
| Insurance companies | ||
| BA (GI) Limited (general insurance company) | UK | Ordinary shares of £0.05 |
| London Life Limited | UK | Ordinary shares of £1 |
| National Provident Life Limited | UK | Ordinary shares of £1 |
| NPI Limited | UK | Ordinary shares of £1 |
| Pearl Assurance plc | UK | 'A' ordinary shares of £0.05 |
| PA (GI) Limited (general insurance company) | UK | Ordinary shares of £0.01 |
| and deferred shares of £0.25 | ||
| Phoenix Life Limited | UK | Ordinary shares of £1 |
| Phoenix & London Assurance Limited | UK | Ordinary shares of £1 |
| Phoenix Pensions Limited | UK | Ordinary shares of £1 |
| Scottish Mutual International Limited | ROI | Ordinary shares of €1.25 |
| Non-insurance companies | ||
| Axial Fixed Income Opportunities S.a.r.l. (investment vehicle) | Luxembourg | Ordinary shares of €100 |
| Ignis Asset Management Limited | UK | Ordinary shares of £1 |
| (investment management company) | ||
| Ignis Investment Management Limited | UK | Ordinary shares of £1 |
| (investment management company) | ||
| Ignis Fund Managers Limited (unit trust management) | UK | Ordinary shares of £1 |
| Ignis Investment Services Limited | UK | Ordinary shares of £1 |
| (investment management company) | ||
| Impala Holdings Limited (holding company) | UK | 'A' ordinary shares of £1, 'B' ordinary |
| shares of £1 and 'D' ordinary shares of £1. | ||
| Mutual Securitisation plc (finance company) | ROI | Quasi subsidiary |
| NP Life Holdings Limited (holding company) | UK | 'A' ordinary shares of £1 and |
| 'B' ordinary shares of £1 | ||
| Opal Reassurance Limited | Bermuda | 'A' ordinary shares of £1 and |
| 'B' ordinary shares of £1 | ||
| PGH (LCA) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (LCB) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (LC1) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (LC2) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (MC1) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (MC2) Limited (finance company) | UK | Ordinary shares of £1 |
| PGH (TC1) Limited (holding company) | UK | Ordinary shares of £1 |
| PGH (TC2) Limited (holding company) | UK | Ordinary shares of £1 |
| Pearl Group Holdings (No. 1) Limited (finance company) | UK | Ordinary shares of £1 |
| Pearl Group Holdings (No. 2) Limited (holding company) | UK | Ordinary shares of £1 |
| Pearl Life Holdings Limited (holding company) | UK | Ordinary shares of £1 |
| Pearl Group Services Limited (service company) | UK | Ordinary shares of £1 |
| PGS 2 Limited (finance company) | UK | Ordinary shares of £1 |
| Pearl Group Management Services Limited (service company) | UK | Ordinary shares of £1 |
| Phoenix Life Holdings Limited (holding company) | UK | Ordinary shares of £1 |
| UK Commercial Property Trust Limited (property fund) | Guernsey | 72% of ordinary shares of £0.25 |
The information disclosed above is only in respect of those undertakings which principally affect the figures shown in the Group's accounts. There are a number of other subsidiaries and associated undertakings whose business does not materially affect the Group's profits or the amount of its assets and particulars of these have been omitted in view of their excessive length.
There is a restriction on the ability of some Group companies to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Impala facility and the £425 million loan facility agreements.
On 5 January 2010 PGH1 announced a proposed restructuring of the Notes. The proposed restructuring was not approved by Noteholders and consequently those proposals were not implemented.
On 23 March 2010 PGH1 gave notice to the holders of the Notes of its decision to defer the coupon payment on the Notes which would otherwise have been due at the next payment date of 25 April 2010. PGH1 announced that this notice will be withdrawn and the 2010 coupon will be paid in full on 25 April 2010 if certain amending proposals are approved by, amongst others, the Noteholders. These proposals include a reduction of 15% in the face value of the Notes and the payment in full of the deferred 2009 coupon by 31 December 2010. Both proposed coupon payments are to be based on the current nominal value of the Notes, being £500 million.
On 15 March 2010 the Company changed its name from Pearl Group to Phoenix Group Holdings.
On 30 March 2010 the Board declared a dividend of €0.17 per share for the year ended 31 December 2009. The cost of this dividend has not been recognised as a liability in the financial statements for 2009 and will be charged to the statement of changes in equity in 2010.
R Sandler J Moss S Smith A Lyons I Ashken R-P Azria D Barnes C Clarke I Cormack T Cross Brown M Dale I Hudson H Osmond D Woods
St Helier 30 March 2010
MCEV supplementary information The Group's primary measure of long‑term shareholder value is MCEV. Group MCEV increased by £783 million during 2009
When compliance with the CFO Forum MCEV principles published in October 2009 is stated those principles require the Directors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any non-compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exception of:
Further detail on these exceptions is included in note 1, Basis of preparation.
Specifically, the Directors have:
Jonathan Moss Simon Smith
St Helier 30 March 2010
Group Chief Executive Group Finance Director
We have audited the Pro forma Consolidated Phoenix Group MCEV (Phoenix Group MCEV) supplementary information, on pages 162 to 177, in respect of the year ended 31 December 2009, which comprises the Summarised consolidated income statement – pro forma Group MCEV basis, Pro forma MCEV earnings per ordinary share, Statement of consolidated comprehensive income – pro forma Group MCEV basis, Reconciliation of movement in pro forma Group MCEV equity and the related notes. The Phoenix Group MCEV supplementary information, has been prepared in accordance with the basis of preparation set out on pages 168 to 171.
Ernst & Young Accountants LLP have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2009.
This report is made solely to the Company's Directors in accordance with our engagement letter dated 26 March 2010. Our audit work has been undertaken so that we might state to the Company's Directors those matters we are required to state to them in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's Directors as a body, for our audit work, for this report, or for the opinions we have formed.
As described in the Statement of Directors' responsibilities on page 160, the directors are responsible for preparing the Phoenix Group MCEV supplementary information, under the basis of preparation set out on pages 168 to 171.
Our responsibilities, as independent auditors, in relation to the Phoenix Group MCEV supplementary information, are established in the UK by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement letter.
We report to you our opinion as to whether the Phoenix Group MCEV supplementary information, has been properly prepared in all material respects in accordance with the basis of preparation set out on pages 168 to 171. We also report to you if we have not received all the information and explanations we require for our audit of the Phoenix Group MCEV supplementary information.
We read other information contained in the Annual Report & Accounts and consider whether it is consistent with the Phoenix Group MCEV supplementary information.
We conducted our audit having regard for International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Phoenix Group MCEV supplementary information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the Phoenix Group MCEV supplementary information, and of whether the accounting policies are appropriate to the Phoenix Group Holdings' circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Phoenix Group MCEV supplementary information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of the Phoenix Group MCEV supplementary information.
In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2009, has been properly prepared, in all material respects, in accordance with the basis of preparation set out on pages 168 to 171.
Ernst & Young LLP London 30 March 2010
MCEVsupplementary
For the year ended 31 December 2009
| 2009 £m |
|
|---|---|
| Life MCEV operating earnings | 380 |
| Management services operating profit | 14 |
| Ignis Asset Management operating profit | 34 |
| Corporate operating loss | (54) |
| Group MCEV operating earnings before tax | 374 |
| Economic variances on covered business | 701 |
| Economic variances on non-covered business | (245) |
| Non-recurring items | (78) |
| Gain on debt refinancing | 491 |
| Finance costs attributable to owners | (390) |
| Group MCEV earnings before tax | 853 |
| Tax on operating earnings | (105) |
| Tax on non-operating earnings | (197) |
| Total tax | (302) |
| Group MCEV earnings | 551 |
For the year ended 31 December 2009
| 2009 | |
|---|---|
| Group MCEV operating earnings after tax | |
| Basic1 | 291.5p |
| Diluted2 | 254.4p |
| Group MCEV earnings after tax | |
| Basic1 | 597.2p |
| Diluted2 | 521.1p |
| 1 Based on 92,269,310 shares |
2 Based on 105,732,020 shares, allowing for warrants in issue
The earnings on covered 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 28%.
For the year ended 31 December 2009
| 2009 £m |
|
|---|---|
| Group MCEV earnings for the year after tax | 551 |
| Other comprehensive income | |
| Actuarial losses on defined benefit pension scheme | (14) |
| Exchange differences on translating foreign operations | (44) |
| (58) | |
| Total comprehensive income for the year | 493 |
| 2009 £m |
|
|---|---|
| Pro forma Group MCEV equity at 1 January 2009 | 1,044 |
| Total comprehensive income for the year | 493 |
| Issue of share capital | 275 |
| Conversion of warrants into ordinary shares | 51 |
| Redemption of shares | (41) |
| Credit to equity for equity-settled share-based payments | 5 |
| Group MCEV equity at 31 December 2009 | 1,827 |
| 2009 £m |
|
|---|---|
| Life MCEV operating earnings (after tax) | |
| Expected existing business contribution | 95 |
| New business value | 22 |
| Non-economic experience variance and assumption changes | |
| – Experience variances | 62 |
| – Other operating variances | 21 |
| – Assumption changes | 73 |
| Total non-economic experience variances and assumption changes | 156 |
| Life MCEV operating earnings after tax1 | 273 |
1 Life MCEV operating earnings is derived on an after tax basis. For presentational purposes Life MCEV operating earnings before tax has been calculated by grossing up the after tax Life MCEV operating earnings using a tax rate of 28%. Life MCEV operating earnings before tax of £380 million is therefore calculated as £273 million (as above) grossed up for tax at 28%
The expected contribution of the existing business for the year ended 31 December 2009 was £95 million after tax. This represents the expected return on the opening MCEV using a one year gilt forward rate plus the Group's short-term expectations of excess investment returns on equities, properties and bonds. This rate is expected to increase in line with the forward gilt yield curve.
New business profits generated during the year amounted to £22 million after tax and represent the value of vesting pension policies not reflected in the opening MCEV. These arise from pension policies which have no attaching annuity guarantees.
The new business margin is 5% after tax and represents the ratio of the net of tax new business value to the amount received as new single premiums.
The life companies' non-economic experience variances and assumption changes for the year ended 31 December 2009 contributed £156 million to pro forma MCEV operating earnings after tax.
Favourable experience and other operating variances of £83 million primarily related to several management actions including the resolution of certain legacy issues, partially offset by the strengthening of regulatory capital requirements and capital policy in some life companies following the acquisition of the Pearl businesses by Phoenix Group Holdings. Favourable assumption changes of £73 million mainly related to harmonisation of longevity assumptions across the Group and the results of an annuitant survival investigation.
Ignis Asset Management's performance was favourable throughout the year generating a pro forma IFRS operating profit before tax of £34 million.
The Corporate operating loss of £54 million before tax for the year ended 31 December 2009 includes:
Positive economic variances in 2009 of £504 million after tax reflect the benefit of the reduction in credit spreads on corporate bonds and favourable equity and yield movements, partially offset by an increase of £36 million in the market value of listed debt issued by Phoenix Life Limited (ex-Scottish Mutual Assurance).
The economic variances on non-covered business of £245 million before tax primarily relate to the increase in the market value of listed debt issued by the Group's subsidiary Pearl Group Holdings (No. 1) Limited and Phoenix Group Holdings warrants, which reduced MCEV earnings by £169 million and £51 million respectively. In addition, the economic variances include a £29 million foreign exchange loss incurred by Phoenix Group Holdings primarily related to its euro cash holdings prior to its capital injection into the Pearl businesses. Having reduced its euro cash holdings, Phoenix Group Holdings' exposure to foreign exchange fluctuations has reduced.
Non-recurring items reduced the embedded value by £78 million before tax and primarily include:
As part of their acquisition by Phoenix Group Holdings, the Pearl businesses successfully refinanced their external borrowings resulting in an overall reduction of £575 million in exchange for cash and an issue of warrants totalling £84 million.
| 2009 | |
|---|---|
| £m | |
| Debt finance costs1 | 176 |
| Debt issue | 202 |
| Other finance costs | 12 |
| Finance costs attributable to owners | 390 |
1 Finance costs on the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes
Debt financing costs include interest of £142 million on the holding company debt for the eight-month period prior to the refinancing (as discussed above) and interest on the refinanced debt on amended terms thereafter of £34 million for the final four-month period.
As part of Phoenix Group Holdings' acquisition of the Pearl businesses, fees of £202 million were paid to the banks as consideration to facilitate the transaction. The consideration was in the form of equity issued to the lenders by Phoenix Group Holdings and therefore resulted in a corresponding increase in capital. Under IFRS these debt issue costs are taken into account in determining the cost of acquisition of the Pearl businesses.
Other comprehensive income of £58 million includes £14 million of actuarial losses on defined benefit pension schemes, and £44 million exchange rate losses which will reduce going forward as Phoenix Group Holdings changed its functional currency from euros to sterling during the year.
Capital movements comprised additional shares issued of £275 million at the time of the acquisition of the Pearl businesses, £51 million of shares issued on conversion of the warrants, £5 million of share-based payments offset by £41 million of shares redeemed at the time of the acquisition of the Pearl businesses.
The £275 million of share capital issued includes £202 million in connection with the associated debt restructuring and an additional cash equity injection of £73 million at the time of the acquisition of the Pearl businesses by Phoenix Group Holdings.
| Non-covered business | |||||
|---|---|---|---|---|---|
| Covered business MCEV £m |
Management services IFRS £m |
Asset Management IFRS £m |
Corporate1 IFRS £m |
Group MCEV £m |
|
| Pro forma Group MCEV at | |||||
| 1 January 2009 | 4,081 | 122 | 34 | (3,193) | 1,044 |
| Operating MCEV earnings (post-taxation) Non-operating MCEV earnings |
273 | 10 | 24 | (38) | 269 |
| (post-taxation) | 511 | (25) | (4) | (200) | 282 |
| Total MCEV earnings | 784 | (15) | 20 | (238) | 551 |
| Foreign exchange | – | – | – | (44) | (44) |
| Other movements | – | – | – | (14) | (14) |
| Capital and dividend flows – internal | (134) | (51) | (15) | 200 | – |
| Capital and dividend flows – external | – | – | – | 290 | 290 |
| Closing value at 31 December 2009 | 4,731 | 56 | 39 | (2,999) | 1,827 |
1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions
For the year ended 31 December 2009
| 2009 Group £m |
|
|---|---|
| Group net assets attributable to owners of the parent as reported under IFRS at 31 December 2009 | 1,412 |
| Goodwill and other intangibles in accordance with IFRS (after tax) | (413) |
| Value of in-force business in accordance with IFRS (after tax) | (1,419) |
| Adjustments to IFRS reserving | (98) |
| Tax adjustments | (99) |
| Revalue listed debt to market value | 235 |
| Eliminate value of contingent loans asset1 | (194) |
| Fair value adjustments2 | (40) |
| Eliminate pension scheme surplus3 (after tax) | (45) |
| Other adjustments | (9) |
| MCEV net worth attributable to owners of the parent at 31 December 2009 | (670) |
1 Removal of value attributed to contingent loans issued by holding companies to long-term funds as their expected repayments are captured within the
MCEV VIF calculations. 2 Investments carried at amortised cost under IFRS are revalued at market value.
3 The pension scheme surplus removed is the economic surplus of the PGL scheme, as described in note 32 to the IFRS consolidated financial statements, after tax.
The supplementary information on pages 162 to 177 covering the year to 31 December 2009 has been prepared on a Market Consistent Embedded Value ("MCEV") basis, except for the items described further below.
Whilst the IFRS consolidated financial statements consolidate the results of the Pearl businesses for the period from acquisition on 28 August 2009 to 31 December 2009, the pro forma MCEV results include a full year's contribution for the acquired Pearl businesses. The pro forma MCEV results are therefore based on the results of the Group plus the Pearl businesses for the period prior to their acquisition by Phoenix Group Holdings.
The supplementary MCEV information reflects the financial position of the Group at 31 December 2009. The asset management and management service businesses are included in the Group MCEV at the value of IFRS net assets and do not include the future earnings from their existing business. This is because, in the opinion of the Directors, applying the CFO Forum MCEV principles and guidance to these businesses would not provide a fair reflection of the Group's financial position, as explained in note 8.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in October 2009, except that:
The Group MCEV allows for methodology changes from previously published embedded values. The methodology changes have been implemented to better align the Group's MCEV methodology with the CFO Forum principles. Details of the methodology changes and a reconciliation to the Group MCEV at 31 December 2008, as published in the proxy statement of 3 July 2009, are provided in note 8.
The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management, the management service companies and business carried on at the Corporate level.
Opal Re is included within covered business and is valued on a basis consistent with the annuity business within the life companies.
The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and liabilities are valued in line with market prices and consistently with each other. Details of the key components of the MCEV are discussed below.
Free surplus and required capital together comprise the net worth of the life insurance business.
For the Group's life companies, net worth is defined as the market value of shareholder funds plus the shareholders' interest in surplus assets held in long-term business funds less the market value of any outstanding debt of the life companies.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in the life company nor as a liability in the holding company. This presentation has no impact on the overall MCEV but does affect the allocation of net assets between covered and non-covered business.
MCEV allocates net worth between required capital, whose future distribution to shareholders is restricted by regulatory requirements, and free surplus.
For the Group, required capital is defined as the greater of:
On this basis the required capital measure is 125% of the solvency capital at which the regulator is empowered to take action.
Net worth in excess of required capital is free surplus.
The European Solvency II Directive will introduce a new capital regime for insurers during 2012. These disclosures do not take account of the impact of the change in regime as this is still under development.
(b) Value of in-force business ("VIF")
The value of in-force covered business consists of the following components:
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.
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more detail below):
MCEVsupplementary
continued
The PVFP represents the present value of profits attributable to shareholders arising from the in-force business. The PVFP is calculated by projecting and discounting using risk-free rates, with an allowance for liquidity premiums where appropriate.
The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence to justify; for example in allowing for future mortality improvements on annuity business.
The Group's embedded value includes an explicit allowance for the time value of financial options and guarantees embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees to shareholders is calculated using market-consistent stochastic models calibrated to the market prices of financial instruments as at the period end.
The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles and Practices of Financial Management. The modelling of management actions vary for each of the funds but typically include management of bonus rates and policy enhancements, charges to asset share to cover increases to the cost of guarantees and alterations to investment strategy.
COC is defined as the difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes.
The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
No allowance for the cost of non-hedgeable risk has been made, as in the opinion of the Directors, the cost of residual non-hedgeable risk 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.
However, the cost of residual non-hedgeable risk calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating further risk management actions, has been disclosed below.
For with profits business the theoretical cost of residual non-hedgeable risk would increase the TVFOGs by £93 million.
For other business the cost would be £141 million. This equates to an equivalent average cost of capital charge of 1.6%. The level of capital assumed in this calculation is determined based on a 99.5% confidence level over a one-year time horizon, consistent with the ICA methodology. Allowance is made for diversification benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.
Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV principles.
The National Provident Life Securitised Bonds are backed by surpluses that are expected to emerge on blocks of its unit linked and unitised with profits business. This securitisation has been valued on a cash flow basis, allowing for payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised unit linked and unitised with profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
Unlisted bank debt owed by the holding companies is included at face value.
Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of non profit funds. This allowance reflects the projected pace of releases of surplus from non profit funds that is not required to support with profits funds.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies. The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by the projected embedded value of the Group's businesses.
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
New business includes all other annuities written by the life insurance companies.
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
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 company's Principles and Practices of Financial Management.
The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme surpluses.
Notes to the pro forma MCEV financial statements continued
| 2009 | 2008 | |
|---|---|---|
| MCEV | MCEV | |
| £m | £m | |
| Net worth | 2,234 | 1,816 |
| PVFP | 2,864 | 2,680 |
| TVFOG | (97) | (206) |
| COC | (270) | (209) |
| 4,731 | 4,081 |
The net worth of covered business of £2,234 million at December 2009 consisted of £1,826 million of required capital and £408 million of free surplus.
| Total | |||
|---|---|---|---|
| Net worth |
VIF | Life MCEV |
|
| [£m] | £m | £m | |
| Life pro forma MCEV at 1 January 2009 | 1,816 | 2,265 | 4,081 |
| New business value | 18 | 4 | 22 |
| Expected existing business contribution (reference rate) | 32 | 27 | 59 |
| Expected existing business contribution (in excess of reference rate) | 10 | 26 | 36 |
| Transfer from VIF | 181 | (181) | – |
| Experience variances | 51 | 11 | 62 |
| Assumption changes | 165 | (92) | 73 |
| Other operating variances | (14) | 35 | 21 |
| Operating Life MCEV earnings | 443 | (170) | 273 |
| Economic variances | 66 | 438 | 504 |
| Other non-operating variance | 12 | (5) | 7 |
| Total Life MCEV earnings | 521 | 263 | 784 |
| Capital and dividend flows | (103) | (31) | (134) |
| Life MCEV at 31 December 2009 | 2,234 | 2,497 | 4,731 |
The value generated by new business written during the period is calculated as the present value of the projected stream of after tax distributable profits from that business. This contribution has been valued using economic and non-economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in-force covered business.
| 2009 | |||
|---|---|---|---|
| Premium £m |
MCEV £m |
MCEV/Premium % |
|
| New business | 401 | 22 | 5% |
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.
| Years | 2009 | |||||
|---|---|---|---|---|---|---|
| 1–5 | 6–10 | 11–15 | 16–20 | 20+ | Total | |
| £m | £m | £m | £m | £m | £m | |
| Present value of | ||||||
| future profits | 975 | 767 | 508 | 305 | 309 | 2,864 |
Risk-free rates are based on the annually compounded UK government bond nominal spot curve plus ten basis points, extrapolated as necessary to meet the term of the liabilities. Recognising that this is a departure from MCEV principles, a sensitivity based on swap yields is disclosed.
The risk-free rates assumed for a sample of terms were as follows:
| Year ended 31 December 2009 | Year ended 31 December 2008 | |||
|---|---|---|---|---|
| Term | Gilt Yield +10 bps | Swap yield | Gilt Yield +10 bps | Swap yield |
| 1 year | 0.97% | 1.02% | 1.22% | n/a |
| 5 years | 3.13% | 3.49% | 2.87% | n/a |
| 10 years | 4.35% | 4.27% | 3.58% | n/a |
| 15 years | 4.80% | 4.55% | 4.13% | n/a |
| 20 years | 4.86% | 4.55% | 4.34% | n/a |
The swaps rates above are only applicable to sensitivity (12) as disclosed in note 7.
(continued)
In October 2009, the CFO Forum published an amendment to MCEV principles to reflect the inclusion of a liquidity premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk-free yield curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or with in-the-money Guaranteed Annuity Options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. At 31 December 2009 the calculated liquidity premium represented an additional yield above risk-free rates of 30 basis points (31 December 2008: 70 basis points).
For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index ("RPI") as at 31 December 2009 was taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National Average Earnings inflation is assumed to be RPI +100 basis points as at 31 December 2009.
The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at 31 December 2009. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.
A LIBOR Market Model is used to generate risk-free rates over a complete yield curve, calibrated to the UK nominal spot curve plus ten basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.
| End 2009 | Swap term (years) | |||||
|---|---|---|---|---|---|---|
| Option term (years) | 5 | 10 | 15 | 20 | 25 | 30 |
| 5 | 17.0% | 13.1% | 14.3% | 15.1% | 15.9% | 15.4% |
| 10 | 15.7% | 13.8% | 14.8% | 15.4% | 15.6% | 14.7% |
| 20 | 15.9% | 14.1% | 14.6% | 14.4% | 14.0% | 13.0% |
| 30 | 15.7% | 13.6% | 13.5% | 13.0% | 12.3% | 11.5% |
| End 2008 | Swap term (years) | |||||
|---|---|---|---|---|---|---|
| Option term (years) | 5 | 10 | 15 | 20 | 25 | 30 |
| 5 | 16.6% | 15.4% | 15.5% | 15.9% | 16.1% | – |
| 10 | 12.5% | 13.9% | 14.5% | 14.5% | 14.1% | – |
| 20 | 18.4% | 18.6% | 17.4% | 15.9% | 14.3% | – |
| 30 | 17.6% | 17.1% | 15.5% | 14.1% | 12.8% | – |
Real interest rates have been modelled using the two-factor Vasicek model, calibrated to index-linked gilts. Equity volatility is calibrated to replicate the prices on a range of FTSE equity options, and extrapolated beyond terms available in the market. The equity volatility model used allows volatility to vary with both term and the level of the equity index.
| Term (years) | 5 | 10 | 15 | 20 | 25 | 30 | |
|---|---|---|---|---|---|---|---|
| Equity implied volatility | End 2009 | 25.3% | 26.6% | 27.3% | 27.5% | 27.6% | 27.7% |
| (ATM) | End 2008 | 34.4% | 34.6% | 33.4% | 33.1% | 32.8% | 32.5% |
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 2009 is 15%. The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, with an additional allowance for the credit risk premium, derived from current markets.
MCEV operating earnings assume investment returns based on the one-year risk-free rate at the beginning of the reporting period, plus expected returns in excess of the risk-free rate (an asset risk premium). The table below sets outs the asset risk premiums used:
| 2009 % |
|
|---|---|
| Equities | 2.5 |
| Property | 2.0 |
| Gilts | 0.0 |
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit risk.
(continued)
Each life company's projected per policy expenses are based on existing management services agreements with the Group's service companies, adjusted to allow for additional costs incurred directly by the life companies, including, for example, regulatory fees and one-time expenses.
The life companies' projected investment expenses are based on the fees agreed with Ignis Asset Management, (or external fund managers, where appropriate), allowing for current and projected future asset mixes.
The Group's consolidated balance sheet as at 31 December 2009 includes Perpetual Reset Capital Securities with a face value of £500 million and subordinated debt with a face value of £200 million in relation to Phoenix Life Limited (ex-Scottish Mutual Assurance). These listed securities have been included within the MCEV at their market value quoted at the reporting date.
The table below summarises the value of these debt obligations as at 31 December 2009.
| 2009 | 2008 | |||
|---|---|---|---|---|
| Listed debt and non-controlling interests | Face value (including accrued interest) £m |
Market value £m |
Face value (including accrued interest) £m |
Market value £m |
| Perpetual Reset Capital Securities Phoenix Life Limited (ex-Scottish Mutual Assurance) |
540 | 264 | 517 | 95 |
| subordinated debt | 211 | 156 | 211 | 120 |
Unlisted debt has been included at face value.
| 2009 | 2008 | |
|---|---|---|
| Face value | Face value | |
| Unlisted debt | £m | £m |
| Pearl and Impala facilities | 2,760 | 3,085 |
| Royal London PIK note | 102 | 332 |
The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2009:
| 2009 | |
|---|---|
| Total Life | |
| MCEV £m |
|
| (1) Base | 4,731 |
| (2) 1% decrease in risk-free rates | 135 |
| (3) 1% increase in risk-free rates | (167) |
| (4) 10% decrease in equity/property market values | (156) |
| (5) 100 bps increase in credit spreads1 | (365) |
| (6) 25% increase in equity/property implied volatilities | (19) |
| (7) 25% increase in swaption implied volatilities | (57) |
| (8) 10% decrease in lapse rates and paid-up rates | (19) |
| (9) 5% decrease in annuitant mortality | (183) |
| (10) 5% decrease in non-annuitant mortality | 20 |
| (11) Required capital equal to the minimum regulatory capital | 81 |
| (12) Swap curve as reference rate, retaining appropriate liquidity premiums | (160) |
1 25 bps is assumed to relate to default risk.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the terms of agreements with the management services companies.
The MCEV allows for methodology changes from previously published embedded values. The methodology changes have been implemented to better align the Group's methodology with the CFO Forum principles. Details of these adjustments and methodology changes and a reconciliation to the EV at 31 December 2008, as published in the proxy statement of 3 July 2009, are provided below.
| Note | Group £m |
|
|---|---|---|
| Unaudited historical pro forma net EV as disclosed in the Proxy Statement as at 31 December 2008 |
1,265 | |
| Phoenix Group Holdings IFRS net assets at 31 December 2008 | 573 | |
| MCEV of Opal Re at 31 December 2008 | (a) | 12 |
| Proforma Group MCEV before methodology changes | 1,850 | |
| Methodology changes: | ||
| PVFP of non-covered business | (b) | (630) |
| Reduced liquidity premiums | (c) | (251) |
| Vesting annuities | (d) | 65 |
| Other changes | 10 | |
| Pro forma Group MCEV at 31 December 2008 | 1,044 |
Additional information
Meeting Our Annual General Meeting will be held on: 23 June 2010 The voting results for our 2010 AGM, including proxy votes withheld, will be available on our website shortly after the meeting at the following address. Ó www.thephoenixgroup.com Shareholder services Managing your shareholding Our registrar, The Royal Bank of Scotland N.V. (RBS), maintains the Company's register of members and if you have any queries in respect of your shareholding, please contact them directly using the contact details set out below: Registrar details RBS Gustav Mahlerlaan 10 (HQ3130) 1082 PP Amsterdam The Netherlands Telephone number: +31 20 464 3707 Fax number: +31 20 464 1707 (Monday to Friday 8.00am to 4.30pm) 8 Email: [email protected]
Share price
You can access the current share price of Phoenix Group Holdings ordinary shares at
| Announcement of financial results for the year ended 31 December 2009 | 31 March 2010 |
|---|---|
| Annual General Meeting | 23 June 2010 |
| Announcement of first quarter interim management statement | 17 May 2010 |
| Announcement of unaudited six months' interim results | 27 August 2010 |
| Announcement of third quarter interim management statement | 5 November 2010 |
| Ordinary shares – 2009 final dividend | |
| Ex-dividend date | 6 April 2010 |
| Record date | 8 April 2010 |
| Dividend payment date | 15 April 2010 |
| Interim dividend – 2010 | |
| Dividend payment | October 2010 |
The 2009 Annual Report and Accounts contains forward-looking statements about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives.
Statements containing the words: "believes", "intends", "expects", "plans", "seeks" and "anticipates" or other words of similar meaning are forwardlooking. Forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that have been estimated.
Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to:
As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within the Annual Report & Accounts 2009. The Group has no obligation to update any of the forward-looking statements contained within the Annual Report & Accounts 2009.
The Annual Report & Accounts 2009 has been prepared for the members of the Company and no one else. The Company, its directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the Annual Report & Accounts 2009 should be construed as a profit forecast.
| Glossary | ABI | Association of British Insurers – Represents the collective interests of the UK's insurance industry. |
|---|---|---|
| ABS | Asset Backed Securities – A collateralised security whose value and income payments are derived from a specified pool of underlying assets. |
|
| ACSM | Alternative Coupon Satisfaction Mechanism – A deferred coupon settled through the issuance of share capital. |
|
| AGM | Annual General Meeting. | |
| ALM | Asset Liability Management – Management of risks that arise due to mismatches between assets and liabilities. |
|
| Asset Management | A structured approach that guides the act of acquiring and disposing of assets to maximise shareholder and policyholder investment returns. |
|
| AUM | Assets Under Management – The total value of assets that the Group manages and administers for itself and its customers, including assets managed for third parties outside the context of insurance. |
|
| Black-Scholes | A mathematical model used to calculate the value of an option. | |
| BSP | Bonus Share Plan – The Group's incentive programme under which a bonus is paid to employees in accordance with rules concerning eligibility, performance targets, time period, and size and form of payments. |
|
| CA06 | UK Companies Act 2006. | |
| CEIOPS | The Committee of European Insurance and Occupational Pensions Supervisors – 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. |
|
| CFO Forum | A high-level discussion group formed of the Chief Financial Officers of major European listed and non-listed insurance companies. |
|
| Closed Life Fund | A fund that is closed to new business and no longer accepts funds from new customers. The fund continues to be managed for the existing policyholders. |
|
| COC | Frictional cost of capital – The expected cost of investment expenses and tax arising from the investment of shareholder owned assets backing the capital requirements of an insurance company. |
|
| Combined Code | Standards of good corporate governance practice in the UK relating to issues such as board composition and development, remuneration, accountability, audit and relations with shareholders. The current version of the Code is the June 2008 edition. |
|
| Corporate Governance | The framework of customs, policies, procedures, laws and institutions influencing the way a corporation or company is managed. |
|
| CNHR | Cost of residual non-hedgeable risk – The expected cost of non-hedgeable risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOG. This can include both financial risks and non-financial risks such as mortality, persistency and expense risk. |
|
| DPF | Discretionary Participation Feature – A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is at the discretion of the issuer. |
|
| EEA | European Economic Area – Established on 1 January 1994 and is an agreement between Norway, Iceland, Liechtenstein and the European Union. It allows these countries to participate in the EU's single market without joining the EU. |
|
| EU | European Union. |
| Euronext | A pan-European Stock Exchange based in Amsterdam, Holland. |
|---|---|
| EV | See MCEV. |
| Financial Reporting Council |
The UK's independent regulator responsible for promoting confidence in corporate reporting and governance. |
| FSA | Financial Services Authority – The UK regulator for the financial services industry. |
| GAO/GAR | Guaranteed Annuity Option/Rate – An option or rate available to certain pension policyholders to acquire an annuity at a contractually guaranteed conversion rate. |
| GCO | Guaranteed Cash Option – An option to convert an annuity benefit into cash on guaranteed terms. |
| GCR | Group Capital Resources – In accordance with the UK regulatory regime for insurers firms are required at all times to maintain overall financial resources to ensure liabilities can be met as they fall due. |
| GCRR | Group Capital Resource Requirement – In accordance with the UK regulatory regime for insurers it is the sum of the individual capital resource requirements for the insurer and each of its regulated undertakings. |
| HMRC | Her Majesty's Revenue and Customs. |
| ICA | Individual Capital Assessment – A firm's assessment of the amount of capital required to ensure that assets exceed liabilities 99.5% of the time over a one-year period |
| IFRS | International Financial Reporting Standards – Accounting standards, Interpretations and the Framework adopted by the International Accounting Standards Board. |
| IGD | Insurance Groups Directive – Requires an EEA insurance Group holding company to prepare and submit to its regulatory supervisor a group capital adequacy calculation, assessing the level of insurance and financial risk and the resources available to cover the risk. |
| IMC | Investment Management Contract – A contract between an investor and an investment manager. |
| IMMFA | Institutional Money Market Funds Association – The trade association which represents the European triple-A rated money market funds industry. |
| Insider Warrant | Warrants held by the original founders and sponsors of the Company. |
| IPO | Initial Public Offering. |
| LIBOR | London Inter-Bank Offer Rate – Interest rate that banks charge each other for loans of varying short-term maturities. |
| LSE | London Stock Exchange. |
| LTICR | Long-Term Insurance Capital Component – Capital required to be held for regulatory purposes in respect of investment, expense and insurance risks. |
| LTIP | Long-Term Incentive Plan – A reward system designed to improve employees' long-term performance. |
| MCEV | Market Consistent Embedded Value – A measure of the consolidated value of shareholders' interests calculated using the Group's MCEV methodology as described in the note 1 of the MCEV supplementary information. |
| MSA | Management Services Agreement – A contract that exists between Phoenix Life and management services or between management services and their outsourced services providers. |
| Open Ended Investment Companies |
A type of company or a fund in the UK that is structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size. |
| PGL EBT | Pearl Group Limited Employee Benefit Trust. |
Glossary (continued)
| PIK | Payment-in-kind. |
|---|---|
| PPFM | Principles and Practices of Financial Management – An FSA requirement to produce a publicly available account of how a company's with profits business is run to ensure customers are treated fairly. |
| Premium Listing | From 6 April 2010 a Premium Listing replaces the pre-existing Primary Listing on the London Stock Exchange. Under a Premium Listing companies are required to comply with "premium" or "super-equivalent" standards. |
| Public Warrant | Warrants of the Company currently listed on Euronext. |
| PVFP | Present Value of Future Profits – The present value of profits attributable to shareholders arising from the in-force business. |
| RCR | Resilience Capital Requirement – additional amounts of capital required to be held for regulatory purposes as a result of two stress tests. |
| RPIX | Retail Price Index excluding mortgage interest payments – Official measure of the general level of inflation as reflected in the retail price of goods and services. |
| Solvency II | A fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a set of EU-wide capital requirements and risk management standards that will replace the current Solvency I requirements. |
| SPAC | A Special Purpose Acquisition Company is a company set up with the express purpose of acquiring other businesses. |
| TCF | Treating Customers Fairly – A central FSA principal that aims to ensure an efficient and effective market and thereby help policyholders achieve a fair deal. |
| TSR | Total Shareholder Return – The total return of a stock to an investor (capital gain plus dividends). |
| TVFOG | Time value of financial options and guarantees embedded within insurance contracts. |
| UEL | Useful Economic Life – The period over which fixed assets are depreciated. |
| UKCPT | UK Commercial Property Trust Limited – A property subsidiary of the Group which is domiciled in Guernsey and listed on the London Stock Exchange. |
| UKLA | UK Listing Authority – The FSA acting as the competent authority for listing, is referred to as the UKLA, and maintains the official list. |
| UK GAAP | Generally Accepted Accounting Principles adopted within the UK. |
| VIF | The Value of in-force business – The Present Value of Future Profits (PVFP) plus the Time Value of Financial Options and Guarantees (TVFOG) less the Frictional Costs of Required Capital (COC). |
| WPICC | With profit insurance capital component. The WPICC is the amount by which the regulatory surplus exceeds the realistic surplus. |
Paper information This annual report is printed on Revive 50:50 white silk. This paper is produced from 50% recycled fi bre and 50% virgin fi bre. Both the paper mill and printer involved in the production support the growth of responsible forest management and are both accredited to ISO 14001 which specifi es a process for continuous environmental improvement and both are FSC certifi ed. If you have fi nished reading this report and no longer wish to retain it, please pass it on to other interested readers or dispose of it in your recycled paper waste.
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Radley Yeldar Photography
Will Morgan, Mike Ellis, Gus Powell
Registered address: Phoenix Group Holdings PO Box 309 Ugland House Grand Cayman KY1-1104 Cayman Islands
Cayman Islands Registrar of Companies number 202172
Principal place of business: Phoenix Group Holdings 1st Floor 32 Commercial Street St Helier JE2 3RU Jersey
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