Annual Report • Jun 9, 2011
Annual Report
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Phoenix Group is the UK's largest specialist closed life and pension fund consolidator with over 6 million policyholders and in excess of £67 billion of assets under management.
As a closed life business consolidator Phoenix Life focuses on the efficient run-off of existing policies, maximising economies of scale and generating capital efficiencies through operational improvements. IGNIS focuses on the management of multi-asset funds, delivering strong investment performance and high quality service to its clients.
The Group's strength is derived from the intelligent combination and leverage of both the Phoenix Life and IGNIS Asset Management businesses.
To improve returns for Phoenix policyholders and IGNIS customers and deliver value for shareholders.
To be recognised as 'the industry solution' for the safe, innovative and profitable decommissioning of closed life funds and as a specialised global asset manager.
Our mission and vision are based on the three pillars of structure, manage and acquire. These are underpinned by trust and competence.
Our business Operating structure Management team Our strategy
26 Basis of preparation
Cash generation Group MCEV IFRS operating profit Capital management Risk management
strategy
Overview
responsibility
statemen ts
Principal risks and uncertainties facing the Group Corporate responsibility Approach Workplace External stakeholders Community Environment Board of Directors Directors' report Corporate governance report Remuneration report Statement of Directors' responsibilities Independent Auditor's report Consolidated IFRS financial statements Notes to the consolidated IFRS financial statements Statement of Directors' responsibilities Independent Auditor's report MCEV financial statements Notes to the MCEV financial statements Shareholder information 193 Glossary
In 2010 the Phoenix Group performed at the top of its target range for its key financial objectives.
Key financial OBJECTIVEs
£373m Group IFRS operating profit
£1.0bn IGD capital surplus (estimated)
£2.8bn IGD Excess Capital (estimated)
£46m Asset management operating profit
£750m – £850m
Operating companies' cash generation in 2011
£100m
Contribution to MCEV from management actions per annum until 2014
<50% Reduce gearing to below 50% by the end of 2011
Gearing ratio
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"A year of considerable progress, both strategically and financially"
Phoenix Group has enjoyed a year of considerable progress, both strategically and financially. We met all our key financial objectives; exceeded the top of our range for the generation of cash and cash equivalents; saw the integration of our two asset management businesses under the IGNIS brand; delivered our targets for management actions; simplified the Group's capital structure and achieved a Premium Listing on the LSE with subsequent FTSE 250 Index inclusion. These achievements create an excellent platform for further development in 2011 and beyond.
As a consequence of this performance, I am pleased to report to shareholders that the Board has decided to recommend a final dividend for the year of 21p per share, making a total of 42p per share for the financial year. Shareholders may again elect to receive their dividends as scrip.
The simplification of our capital structure in 2010 and the subsequent achievement of the Premium Listing on the LSE were significant steps forward for Phoenix and rightly attracted considerable attention. Less publicised were our continuing investments in the development of our operating platform for the management of our closed life funds and the policies dependent on them. The Phoenix platform represents a unique proposition for the integration, structuring, de-risking and management of closed funds, presenting a rich source of future
value for both policyholders and shareholders alike. We have identified a number of opportunities for further development, both in Phoenix Life and IGNIS, which will be pursued in 2011.
The Phoenix business model, and the investment proposition that it delivers, rest on cash generation. It is the scale and predictability of the Group's cash flows that give us confidence in our long-term financial stability and the consistency of our financial performance. The investments we are making in the Phoenix operating platform underpin our cash flows and deliver opportunities to enhance and accelerate these. Our debt structure, whilst low cost, includes various constraints and we are in dialogue with our lenders to find ways of removing some of these burdens but they will only be pursued if they represent good value for our shareholders.
In due course, we expect to grow further by acquisition. There are many hundreds of billions of pounds in closed or quasi-closed life funds, particularly in the with-profits sector. We are aware that current operators of those funds are reviewing whether they wish to continue to apply scarce capital to maintain this line of business and we expect that many will decide that they wish to exit.
Millions of individuals have a substantial portion of their savings invested in closed life funds. Running these off as individual funds creates an uncertain future of escalating administrative
information
Ron Sandler Chairman
costs and diminishing expertise to look after these policies. This is why the Phoenix consolidation vision is so important to policyholders as well as to our shareholders. We are the only specialist participant in the UK market with the scale, expertise and low-cost operating platform that is capable of taking on large closed books of business and integrating them into a larger whole. In doing so, we can reduce costs and diversify risk. This enables us to invest in a broader range of asset classes with the aim of improving policyholder returns and releasing surplus capital to shareholders.
During the year, a search was initiated for a successor to Jonathan Moss as our Group Chief Executive Officer and I am delighted that this concluded in early February 2011 with the appointment of Clive Bannister to the role. Clive has spent sixteen years in a variety of senior roles at HSBC including his most recent position as a member of the Group Management Board and Global Managing Director of Insurance and Asset Management. He has a first class track record of success in growing businesses, and in developing and leading large teams. On behalf of the Board and all our colleagues at Phoenix, I was pleased to welcome Clive to the Group and I am very much looking forward to working with him. The Board was also pleased to welcome Jonathan Yates, who joined the Board as Group Finance Director in June 2010.
We now have an executive team in situ that is well equipped to lead the Group through the next phase of its development.
The Board wishes to express its thanks to Jonathan Moss and Simon Smith, former Group CEO and Group FD respectively. With skill and resilience, they led the Group through challenging times and brought us to the position of opportunity that we enjoy today. We are very grateful to Jonathan and Simon for their service to Phoenix Group and wish them both well for the future.
Phoenix Group is financially strong and strategically well positioned. The Board wishes to thank all of our colleagues throughout the Group who have produced such good results for 2010 and upon whose efforts we rely for success in the future.
Ron Sandler Chairman
28 March 2011
"Phoenix Group has taken major strides forward in 2010. We set a clear focus on the most important tasks – and we delivered on them all. We have proved that the Phoenix business model works."
Operating companies' cash generation
I was proud and honoured to be offered the opportunity to become Group Chief Executive Officer in February this year. The Phoenix business model creates value by combining our closed life business in Phoenix Life with the asset management capability of IGNIS. This combination delivers a unique and unrivalled potential to play a key role in the decommissioning of the closed life sector. Phoenix Life companies generate cash flows for Group and investment funds for IGNIS, who both manage and leverage the scale of the life company assets to attract talent and produce performance that can also win third party business. This is a blueprint that offers rewards for our shareholders, our customers and the policyholders of other closed life funds that we may seek to integrate into our existing business in the future.
Working for Phoenix is an exciting challenge, because it is a business that does something of real importance for millions of customers, who are always at the heart of our work.
I am excited by the quality of the operating platform that has already been constructed by my colleagues and by the opportunities to develop it further in the years ahead. This applies both to our capacity to structure and manage closed life funds in Phoenix Life as well as to the potential for IGNIS to deliver outstanding performance in the management of policyholder, shareholder and third party assets.
All of the above is being achieved in a culture that is both risk sensitive and alert. The Group is self-evidently actively managing its risk across all aspects of the business. The Group has invested heavily in people, processes and systems ensuring that the consideration of and management of risk is at the forefront of all that we do. This protects our policyholders and other Group stakeholders from unexpected negative outcomes. We will be relentless in managing risk going forward.
Phoenix Group is very fortunate in the quality of its people. The Group has assembled true 'centres of expertise' in Phoenix Life and IGNIS as well as within its Group functions. We are well placed to deliver outstanding investment returns and to integrate and manage closed funds. I am grateful to my colleagues who have made me welcome and who have given me great support.
That the Group comprises a highly talented and motivated team is a tribute to our Human Resources professionals who have done an exceptional job in recruitment, learning and development and employee engagement initiatives as demonstrated by some industryleading scores in our employee surveys.
Clive Bannister Group Chief Executive Officer
Phoenix Group started the year with its main listing on the N Y SE Euronext, with a capital structure that included dilutive instruments equivalent to around 80 percent of the issued shares and T ier 1 Bonds on which a coupon had been deferred. T he year ended with dilutive instruments at less than 20 percent of the issued shares, our T ier 1 Bond coupons fully up to date, a £33 million placing of new shares completed, a Premium L isting on the L SE and membership of the F T SE 250 Index.
In 2010, the Phoenix Group performed at the top of its target range for all its financial objectives. In particular, the operating companies delivered £734 million of cash and cash equivalents to the Holding Companies. T his very strong performance, exceeding our target of £625 million to £725 million, enabled us to meet all our financial commitments and allowed us to pre-pay £122 million of our bank debt. T he total net bank debt stands at £2.3 billion (2009: £2.7 billion).
Cash is the most important financial measure for a closed life business. T his year, Phoenix Group has again demonstrated the cash generative strength of our business model. We have now increased our cash generation target for the five year period from 2010 to 2014 by £0.3 billion to £3.0 billion and published a revised target for 2011 of £750 million to £850 million.
Phoenix Group Holdings
T he Phoenix Group business model will naturally release capital to shareholders as policies run off and, without new business strain or risk, that release of cash becomes increasingly reliable and predictable. Although market dislocation does have the power to disrupt emerging cash flows temporarily, the embedded value in the business remains substantial and ready to be released when temporary factors recede.
IFRS operating profit was £373 million, including a £46 million contribution from IGNIS, against 2009's pro forma £457 million. T he 2009 IFRS operating profit benefited from significant positive longevity assumption changes.
Our year end MCEV was up 15 percent to £2,104 million. We achieved incremental MCEV from value enhancing management actions of £296 million, which was in excess of our target of £145 million.
Our estimated IGD surplus was £1.0 billion at 31 December 2010, with headroom of £0.1 billion over our new IGD capital policy. Following the transfer of the business of Phoenix & L ondon Assurance L imited to Phoenix L ife L imited, the headroom increased to £0.2 billion. We have identified additional actions that will improve this surplus further. We hold an additional £1.8 billion of excess policyholder and shareholder capital within Phoenix L ife Holdings L imited, which is also available to the Group, making total capital available to the Group £2.8 billion at the end of 2010 (2009: £3.1 billion).
Phoenix Group has taken major strides forward in 2010. We set a clear focus on the most important tasks – and we delivered on them all. We have proved that the Phoenix business model works.
Phoenix Life, led by Chief Executive Officer Mike Merrick, contributed MCEV operating earnings after tax of £560 million, an increase of 39 percent on the comparative period (on a consistent basis). Our ability to grow MCEV, even from an existing book of business that is in run-off, is a particular feature of the Phoenix business model. We have the operating platform, the skills and the experience to make this performance repeatable as and when we make accretive acquisitions.
We have received approval to enter into the pre-application process for the use of our internal model under Solvency II. Furthermore, our actuarial systems transformation project is well underway and on track to deliver a single actuarial platform to replace the numerous legacy systems that are currently in use. It will also provide us with real time reporting of our solvency position.
We have continued to develop our outsourced service model. Our largest outsourced service partner, Diligenta, has successfully introduced the BaNCS policy administration platform and has already transferred over 1.6 million live policies and 2.5 million non-live policies onto BaNCS from a variety of outdated and expensive legacy systems. It is vital for the sustainability of our model and the profitability of our partners that we continue to complete these transformations across our book of business.
IGNIS Asset Management, led by Chief Executive Officer, Chris Samuel, was able to grow assets under management from £66.9 billion to £67.5 billion despite the run-off characteristics of the life company assets. This was made possible by a very strong £1.3 billion of net third party sales as well as investment growth. IGNIS also delivered £46 million of IFRS operating profit in 2010, 35 percent higher than the £34 million pro forma number for 2009.
The IGNIS executive team has been considerably strengthened with the hires of Tim Roberts as Chief Operating Officer, Chris Fellingham as Chief Investment Officer, Mark Lovett as Chief Investment Officer – Equities and Michiel Timmerman as Managing Director of IGNIS Advisers. This brings together the multi-manager and fund of funds capacities in hedge funds, real estate, private equity and retail into a single team.
We will continue to explore options with our lenders regarding the best structure and timing for the restructuring of our banking facilities, with a view to changing some of the current covenant constraints. However, our present facilities feature favourable interest margins and we will only agree to new arrangements if an opportunity arises that we consider to be in the best interests of our shareholders.
In parallel, we are setting a new target for gearing of below 50% by the end of 2011.
Financial markets have continued to be volatile and global economic growth has been patchy. Phoenix Group has refined its approach to risk appetite and risk management over the course of the year. We have modelled our solvency and cash flows under a range of testing stress scenarios and we are confident in our ability
to meet our commitments. The approach of the introduction of Solvency II and Basel III, combined with very low levels of net new business in the with-profit sector and the prospect of ever-increasing costs as with-profits funds run-off, will, we believe, lead to opportunities for Phoenix and IGNIS to grow earnings by accretive acquisitions in the coming years.
The Phoenix Group is committed to delivering improved shareholder value. This will be achieved by applying ' The Phoenix Way' to all that we do in the closed life business and leveraging the specialist investment management skills of IGNIS. We are committed to ensuring that there is a better market understanding of the robustness of our business model in 2011 and hope to see shareholders rewarded accordingly. It is our task to ensure that the capital which is in the business is used to best effect to improve policyholder outcomes and shareholder returns.
Treating Customers Fairly ('TCF') is not just an FSA requirement, but something that characterises the ethos of our business and which is central to everything we do. As with all retail financial services companies, we bear a heavy responsibility to keep our customers' savings safe, to treat them with respect and to give our all in pursuit of better returns. It is a heavy responsibility, but also an exhilarating challenge and one that Phoenix and IGNIS are well equipped to meet.
Phoenix Life has improved its customer proposition by taking a more qualitative approach to our requirements for our outsource service partners and the number of complaints has fallen by 24 percent. We expect to make further progress in 2011 with the introduction of an in-house team to deal with those complaints which customers feel have not been dealt with to their satisfaction.
I am a firm believer in the power of brands. Both IGNIS and Phoenix have customer bases that present opportunity for business development through the leverage of those brands. Over the next few months, I intend to review our brands and their commercial potential. We will construct and implement plans which will maximise value from brand development and consequential revenue generation.
'The Phoenix Way' characterises an approach and infrastructure, which is unique in the industry for the integration and management of closed funds. By applying a consistent framework, The Phoenix Way reduces risk, complexity and cost; improves investment performance; improves customer service through effectively working with our outsourcers; enhances MCEV and releases capital to shareholders.
In 2011, continued development of The Phoenix Way will be delivered by our actuarial system transformation, intra group mergers of regulated businesses and the further transformation of our outsource service proposition from legacy systems onto modern platforms. For IGNIS, this means the strengthening of its capacity to deliver sustained investment performance.
We have identified a number of areas for further management actions that will deliver accelerated cash flows and enhance MCEV and I hope to be able to report on these in the course of the year.
I look forward to 2011 with great enthusiasm for all the opportunities that lie in front of us, to serve our customers and make a difference to their lives; to build and deliver value for shareholders; to develop great brands; and to grow our business.
The Phoenix business model, combining the strength of our life companies with our asset management capacity in IGNIS, is a powerful driver of value for our customers and our shareholders.
As Phoenix Group makes that journey, it is essential that we have values to steer us. I believe that this business needs to be action orientated, professional, reliable and to have complete integrity in the way it acts if it is to continue to be successful.
Whether we succeed or fail in our objectives rests on the efforts of all of our colleagues. As Phoenix Group moves into the future, I know how fortunate I am in the quality of the teams we have in IGNIS, in Phoenix Life and in Group. I have every confidence that Phoenix Group is well-equipped for a fulfilling and rewarding journey for all our stakeholders.
Clive Bannister Group Chief Executive Officer 28 March 2011
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| Financial | £734 million operating companies' cash generation – exceeded target range of £625-£725 million |
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| Delivered £296 million of MCEV enhancement through management actions |
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| IGNIS IFRS operating profit increased by 35 percent to £46 million (2009 pro forma: £34 million) |
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| Operational | Achieved a Premium Listing on the London Stock Exchange and FTSE 250 Index inclusion |
| Bonds and settled all outstanding Restructured Tier 1 issues with bondholders |
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| £33 million share issue to settle 2009 Tier 1 Bond Coupon |
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| Received approval to enter into the pre-application process for the use of an internal model for Solvency II |
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| Successful migration of over 4 million policies from legacy systems onto a modern, purpose-built administration platform |
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| Customer | Enhanced customer proposition – working with our outsource service partners to increase focus on qualitative measures |
| Arranged for transfer of business from one outsource service partner (UISL) to another (Diligenta) to enhance and protect customer service and to provide a path to further policy transformation |
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| Customer complaint volumes down by 24 percent on 2009 |
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| Exceeded industry benchmark for open market option transfer payment processing |
| 12 | Our business | |
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| 13 | Operating structure | |
| 15 | Management team | |
| 16 | Our strategy |
Our businesses provide us with a unique base from which to improve performance for our customers and in turn deliver shareholder value.
which we operate continue to be subject to considerable pressures that we believe will present us with significant opportunities in the future.
We have further simplified our outsourcing arrangements in 2010, successfully arranging for the transfer of our UISL business to our existing partner, Diligenta.
We operate in two complementary market sectors: life assurance and asset management. Whilst these sectors continue to face numerous challenges driven by a combination of market volatility, regulatory change and shifts in customer product choice, we believe they present significant opportunities in the future on which we are uniquely positioned to capitalise.
Within our life business we have an array of skills and experience in the management of closed funds which we are able to apply to generate value for customers and shareholders which others would not be able to achieve.
Central to our proposition is listening to our policyholders. Millions of customers depend on Phoenix to manage their funds effectively and communicate clearly and honestly with them in a timely fashion. To ensure we honour this trust, in 2009 we created a wide-ranging programme of customer research enabling us to solicit and respond to policyholders' views. Our rolling programme of telephone and face-to-face surveys by independent research companies ensures we are in touch with customer wants and needs. The findings help us continually to refine our customer proposition.
In order to manage the life businesses efficiently while the policies are in run-off, we aim to minimise the fixed cost element of our operations. This ensures that the Group does not become exposed to high fixed costs in relation to the volume of policies under management.
Our management services team is charged with all sourcing strategies including putting in place arrangements for third party policy administration and maintaining oversight of their performance. Financial and risk management are core skills which are retained in-house.
IGNIS Asset Management manages the funds that back the investments of our policyholders and promotes product propositions that are appropriate to third party clients in the institutional, retail and international markets.
To implement our model we invest heavily in our employees, infrastructure and outsourcer partnerships. As a result we now have a scalable platform into which we can integrate acquired funds and maximise synergy benefits. This is key for the sustainability of our business, providing security and the opportunity to improve both asset performance for customers and the profitability of the business.
Unlike open life businesses, we do not allocate significant capital to support the writing and distribution of new insurance products. This means that the capital requirements of our operating businesses 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 enhancing customer outcomes, financial control, investment management and risk management.
Our structure is aligned to the market sectors in which we operate. The Group has two core segments: life assurance – Phoenix Life; and asset management – IGNIS.
In addition, our Group functions provide support and coordination for the delivery of the Group's strategic initiatives.
At Group level, Phoenix operates centralised functions that provide Group-wide and corporate-level services and manage corporate activity. The Group-level operations include Group Finance and Treasury, Group Tax, Corporate Development and Corporate Finance, Group Risk, Legal Services, HR, Corporate Communications, Strategy and Planning, Investor Relations, Company Secretariat and Internal Audit.
The Group functions have 183 employees, of whom 101 provide services directly to Phoenix Life.
Phoenix Life is responsible for the customer, financial and operational management of the closed life funds. Phoenix Life is led by its Chief Executive Officer, Mike Merrick.
Phoenix Life provides specialist skills with the proven ability to deliver improved customer outcomes from the innovative management of closed funds and annuities which in turn
delivers significant value to shareholders. It has a track record of successfully integrating businesses and is developing a leading-edge model and infrastructure into which future acquired funds can be incorporated.
The business comprises seven 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 further integrate its life companies 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. Writing annuities offers the Group a further opportunity to increase its embedded value through incremental investment returns.
Our latest transfer of business (PALAL to PLL) was implemented to take effect from 1 January 2011.
The Group wrote c.£800 million of new annuity business in 2010.
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Phoenix Group Holdings is also the parent company of Opal Re, a reinsurer based in Bermuda. Opal Re provides reinsurance solely to Phoenix Life to support the diversification of risk on annuity books.
Management service companies deliver all administrative services required by the life companies thereby ensuring they benefit from economies of scale, established outsourcer relationships and an innovative integrated technology infrastructure.
Phoenix Life has 580 employees mainly centred at the Group's Wythall office near Birmingham.
IGNIS Asset Management is the Group's asset management business and is led by its Chief Executive, Chris Samuel. It provides services to the Group's life companies as well as to third party clients, including both retail and institutional investors in the UK and overseas. Now one of the top 15 fund managers in the UK, IGNIS is responsible for £67.5 billion of assets, including £60 billion of assets for the Group's life companies.
With offices in London and Glasgow, and over 500 employees, IGNIS has investment capabilities across multiple asset classes organised into six investment business units:
Throughout 2010 teams from across IGNIS have been working together to develop its strategy for the next round of growth. The aim is clear: to develop IGNIS into a leading asset management business that delivers strong investment performance and high quality service to both Phoenix Life and third party clients.
| Group | 82 |
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| Group employees providing services directly to Phoenix Life |
101 |
| IGNIS | 535 |
| Phoenix Life | 580 |
IGNIS has continued to develop its capabilities in 2010 with the successful attraction of a number of senior management and investment individuals.
Day-to-day direction of the UK operations is the responsibility of the Board of Phoenix Life Holdings Limited ('PLHL') (a subsidiary of Phoenix Group Holdings) and its Executive Management Committee ('ExCo').
ExCo oversees matters relating to the implementation of the Group's strategy and recommends the optimal operating structure. The members of ExCo and their key roles and responsibilities are outlined below.
Governance
Corpora te responsibility
Business
strategy
and
Overview
Our strategy framework continues to build on plans first put in place in 2009.
Our mission is simple: to improve returns for Phoenix policyholders and IGNIS customers, and deliver value for shareholders. Our vision is focused: to be recognised as the 'industry solution' for the safe, innovative and profitable decommissioning of closed life funds and as a specialised asset manager. Our mission and vision are based on three pillars: 'structure', 'manage' and 'acquire', underpinned by trust and competence. This powerful combination of simplicity and focus sets us apart from the crowd.
By bringing together our specialisms of closed fund management and asset management, and responding to the views of our policyholders, we find innovative ways to improve the performance of funds.
The size of our Group means we are able to maximise economies of scale and capital efficiencies. We also have a keen focus on operational excellence and embedding enduring operational improvements.
Underpinning everything we do is attracting and retaining highly talented people who bring not only expertise and new thinking into our business and industry, but also have a passion for improving outcomes for our customers.
The Group has made considerable progress during 2010 in creating a more stable and simplified business. Results to date, both financial and non-financial, have sown the seeds of a convincing track record.
Mission To improve performance for policyholders and investors and deliver value for shareholders
Vision To be recognised as 'the industry solution' for the safe, innovative and profitable decommissioning of closed life funds in the UK with a specialised asset manager alongside
Structure Building and maintaining efficient capital structures releasing cash to shareholders, increasing security and identifying opportunities to improve customer returns
Manage Applying proven Phoenix standards to deliver operational efficiency and drive consistently strong performance
Acquire Growing through acquisition of additional funds offering increased opportunities for shareholder and customer value
Trust Inspiring confidence in customers, vendors, regulators, investors and other key stakeholders by demonstrating we can be trusted to deliver
Competence Achieving high standards of performance and pioneering thought leadership through a highly skilled and motivated team
Business
strategy
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IFRS financia l statemen ts
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– We stated that acquisitions were not a priority for our business in 2010 and, as planned, there has been limited activity.
– Opened dialogue with a number of key potential vendors.
The following pages demonstrate how we are delivering our strategy.
– Maintain high employee engagement.
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It is vital to our continuing success that our people understand our vision for the Company, enjoy their work and are keen to share in our future.
Our 2010 Employee Engagement Survey showed we continue to outperform our peers across all key employee engagement metrics. The Survey demonstrated that we are now within touching distance of achieving 'best in class' levels of engagement: our overall score of 77 percent is 7 percent above the Financial Services benchmark and 17 percent above the results achieved in 2009.
Throughout 2010 several cross-company focus groups met to explore issues and propose actions. These included:
In addition, we launched a flexible benefits scheme and our Premium Listing has also enabled us to introduce a Sharesave scheme.
We are committed to maintaining this level of employee engagement in 2011.
| 81% | Phoenix Group performance compared to Financial Services Benchmark 79% |
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| 73% Benchmark |
Benchmark | 72% Benchmark |
75% Benchmark |
Benchmark |
| Confidence in our Executive team |
I am kept informed |
Opportunities for personal development |
I want to do my best |
This is a good company to work for |
NB: IGNIS data is not included in these results. IGNIS introduced the survey in 2010 and will be integrated in the Group process in due course.
Attracting a broader shareholder base
The year saw the beginning of an important change to our shareholder base, as the Group achieved a Premium Listing on the London Stock Exchange and was included in the FTSE 250 Index. This led to a dramatic increase in liquidity, which rose from an average daily volume of c.17,000 to c.200,000.
Historically, a significant proportion of our shareholders have been US-based and the liquidity of our shares on Euronext had been low. Now, with a Premium Listing on the London Stock Exchange, we are attracting a broader shareholder base.
The move to a Premium Listing owes much to the commitment and expertise of a wide range of individuals from across the Group, who worked hard to prepare the accounts on an IFRS basis, reduce our dilutive instruments from around 80 percent of the issued share capital to below 20 percent, and to publish the prospectus.
During the year, we established a formal Investor Relations function capable of responding to the needs of our shareholders, and developed a full Investor Relations programme consistent with a group of our scale. As well as a broader shareholder base, it is pleasing that analyst coverage of the Phoenix Group has increased, and this is reflective of our greatly expanded City profile. We are very excited about continuing this journey in 2011 and beyond.
Following the successful closure of the Life Company Glasgow office early in 2010, our most recent challenge has been to close the Peterborough site and to ensure that all 2010 Life Company year-end work could be carried out from Wythall (Birmingham). The project, which incorporated a gradual process to facilitate knowledge transfer and systems integration, was completed ahead of budget and plan.
Its success was due in no small part to the commitment and dedication of our employees, a high percentage of whom (over 40 percent) relocated with the work. They were supported throughout the move by a range of initiatives that included familiarisation visits to Wythall, a permanent relocation information room, support from leading relocation specialists and a comprehensive relocation package.
More than 80 percent of those surveyed cited a positive relocation experience. The redundancy support exceeded statutory requirements and included enhanced terms, counselling assistance and the opportunity for career management planning through our award-nominated Next Steps programme.
The high level of support minimised the impact on the morale of the remaining employees, resulting in a 79 percent engagement score at the Peterborough site in November 2010.
Maximising business performance and value
The IGNIS Sterling and Euro Liquidity funds surpassed revenue expectations for 2010, thanks to a combination of exceptional investment performance and a successful drive from the sales team to expand the institutional client base.
By the end of 2010 the Sterling Fund had achieved excellent growth, doubling in size and maintaining its performance at the top end of the market. This fund was a Top 5 performer throughout 2010 and ended the year in 2nd position overall.
The Euro Fund also grew significantly, ending the year as the top-performing fund.
Listening to our customers and acting on their feedback lies at the heart of our new Customer Proposition. During the year we again strengthened our Customer Research Programme to improve the quality of our information and ensure that customers get the most out of their relationship with us.
The customer feedback tools we have employed in recent years – such as telephone surveys and participation in the ABI Customer Impact Scheme – have now been complemented by a new range of initiatives. These include refreshing our telephone surveys and also engaging third party specialists to carry out in-depth customer interviews as well as an automated survey. In 2010, some 24,000 customers took part in these surveys, with very positive results.
Furthermore, customers can now leave comments about their interactions with us. This feedback is reviewed regularly and is an important driver in the continuing commitment to improving our processes.
Customer survey, 2010
Addi tiona l information
Over the last year we have taken action to reduce the risks faced by our funds – and have therefore been able to reduce the surplus assets that have to be held back, without impacting the funds' ability to withstand adverse effects. In addition, as the number of policyholders remaining in our funds falls, we have also been able to release a further percentage of this surplus.
The excess surplus we were able to distribute during 2010 has meant that payouts in the Pearl With-Profits Fund in the second half of the year were around 7 percent higher than would otherwise have been achieved. Although higher payouts cannot be guaranteed in the future, we will keep working hard to realise potential wherever possible.
Balancing security with opportunities for growth
In a leading-edge move within the UK life assurance industry, pension policyholders with guaranteed annuity rates in Phoenix and London Assurance Limited (PALAL) were offered the opportunity to increase their potential return.
They were given the chance to convert their policies by releasing their guarantees in exchange for an immediate enhancement to their fund value and changes to the investment mix to include a significant exposure to investments with potentially higher returns.
Guarantees are valuable because they offer a degree of certainty. However, in order to provide that certainty, PALAL has had to follow a cautious investment policy which constrains returns for most pension policies. The terms of the conversion offered a significant opportunity to receive a higher pension, albeit dependent on future performance.
Policyholders could opt out and have their policy and investment strategy remain unchanged – however only 5 percent chose to do so. Around 50,000 policies were converted at the start of the year. Whilst future returns are unknown, 2010 saw both the new equity and property investments performing well.
The Group has delivered strong performance across all areas of its business. Impressive cash generation by the operating subsidiaries and embedded value growth from value enhancing management actions exceeded the Group's targets for 2010.
| 26 | Basis of preparation | |
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| 27 | Key performance indicators | |
| 31 | Group performance | |
| 31 | – Cash generation | |
| 34 | – MCEV | |
| 39 | – IFRS operating profit | |
| 42 | Capital management | |
| 45 | Risk management | |
| 47 | Principal risks and uncertainties |
The Group performance section 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 MCEV and IFRS basis.
Cash generation is a key measure of the Group's performance. The cash generation section sets out an analysis of the operating companies' cash generation, a measure of cash and cash equivalents remitted by the Group's operating subsidiaries to the Holding Companies, and the Holding Companies' cash outflows.
Phoenix Group Holdings listed on Euronext Amsterdam in February 2008 as a non-operating special purpose acquisition company. In the third quarter of 2009 it acquired a group of businesses that specialise in the consolidation and management of closed life and pension funds referred to as the Pearl businesses.1 The results of the Pearl businesses are included in the consolidated IFRS results of Phoenix Group Holdings from 28 August 2009, the date of acquisition for IFRS purposes.
To assist users and give shareholders a basis for comparison, the Directors have provided additional comparative financial information on a pro forma basis. This information includes for the year ended 31 December 2009 the Pearl businesses 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. Pro forma information therefore includes a full year's results for the Pearl businesses.
Pro forma information is separately referenced throughout the Annual Report and is predominantly located within the following Group performance section and the MCEV supplementary information.
1 PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) Limited and Opal Reassurance Limited, together with their subsidiaries, being the five companies acquired by Phoenix Group Holdings on 2 September 2009, the date the acquisition completed.
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:
Operating companies' cash generation
£734m
(2009 pro forma: £716 million)
Group MCEV
(2009: £1,827 million)
Group IFRS operating profit
£373m
(2009 pro forma: £457 million)
IGD surplus (estimated)
£1.0bn (2009: £1.2 billion)
IGD excess capital (estimated) £2.8bn
(2009: £3.1 billion)
The Group's financial KPIs are analysed overleaf.
Dividend per share
42p
(2009: €0.17 per share*)
Assets under management**
£67.5bn
(2009: £66.9 billion)
Asset management IFRS operating profit
£46m
(2009 pro forma: £34 million)
Gearing ratio
52% (2009: 58%)
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Additional information
Operating companies' cash generation
£734m
(2009 pro forma: £716 million)
The Board's intention is to develop a progressive dividend policy subject to restrictions in the Group's credit agreements. The Board seeks to achieve this through maintaining strong cash flow delivery:
Analysis: Continued strong cash generation by the Group's operating subsidiaries of £492 million enabled the Group to achieve the upper end of its target for cash generation, before value enhancing management actions.
Management actions have generated additional cash flows of £242 million in 2010, exceeding the target of £225 million.
Definition and calculation: Operating companies' cash generation is a measure of cash and cash equivalents remitted by the Group's operating subsidiaries to the Holding Companies and is available to cover dividends, debt servicing and repayments and other operating expenses.
Quantified target: The target cash flows for 2011 to 2016 are £3.2 billion.
£750 million to £850 million of these cash flows are expected to be generated in 2011. Group MCEV £2,104m
(2009: £1,827 million)
The Board considers that MCEV provides the most relevant and consistent means of assessing the Group's ability to enhance value:
Analysis: The Group continues to focus on the operating performance of its underlying businesses. Value enhancing management actions in 2010 delivered an incremental uplift in embedded value of £296 million against a target of £145 million. Management actions include the restructuring of a £1.2 billion portfolio of corporate loans leading to a reduction in asset volatility and an MCEV uplift of £139 million. This restructuring exemplifies one aspect of 'The Phoenix Way' of developing innovative approaches to enhancing shareholder value.
Definition and calculation: Note 1 of the MCEV supplementary information sets out the basis of calculation of the Group MCEV.
Quantified target: The Group's target is a £100 million per annum contribution to MCEV from management actions to 2014.
information
(2009 pro forma: £457 million)
The Board considers that IFRS operating profit is a more representative measure of performance than IFRS profit before tax as it provides long-term performance information and gives an insight into the Group's ability to generate cash flows to support dividends1 :
Analysis: The IFRS operating profit of £373 million reflects a strong performance from both the Group's operating segments. The reduction compared to the prior year is due to the 2009 Phoenix Life operating profit benefiting from favourable longevity assumption changes of £139 million.
Definition and calculation: Note 5 of the IFRS financial statements sets out the basis of calculation of IFRS operating profit.
IGD surplus (estimated)
£1.0bn
(2009: £1.2 billion)
Insurance Groups' Directive ('IGD') surplus is the regulatory assessment of capital adequacy on a Group-wide basis:
Analysis: The decrease in the IGD surplus from 2009 reflects the payment of dividends, pension contributions and debt servicing and repayment costs partially offset by the strong performance of the non-profit funds. The surplus of £1.0 billion represents headroom of £0.1 billion over the Group's new IGD capital policy as set out below and in the Capital management section on page 43.
The court sanctioned funds transfer of the PALAL business into PLL was effective from 1 January 2011 and increased the headroom to £0.2 billion as at 1 January 2011.
Definition and calculation: The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest EEA level insurance group holding company, which is Phoenix Life Holdings Limited ('PLHL'), a subsidiary of Phoenix Group Holdings. IGD surplus is defined as group capital resources less the group capital resource requirement.
IGD capital policy: The Group maintains group capital resources at the PLHL level at an amount in excess of 105 percent of the with-profits insurance capital component ('WPICC'), an additional capital requirement of with-profit funds, plus 145 percent of the group capital resource requirement less the WPICC.
£2.8bn
(2009: £3.1 billion)
IGD Excess Capital includes the total capital available to the Group (both policyholder and shareholder) in excess of capital requirements. It is a measure of the capital strength of the Group and the capital available to protect policyholders and shareholders from adverse events as demonstrated by the insensitive nature of the IGD surplus to market stresses.
The Group manages its capital on this basis in order to maximise shareholder and policyholder value.
Analysis: The decrease in the IGD Excess Capital from 2009 reflects the payment of dividends, pension contributions and debt servicing and repayment costs partially offset by the strong performance of the with-profit and non-profit funds.
The IGD Excess Capital coverage percentage was 170% at 31 December 2010 (2009: 191%).
Definition and calculation: IGD Excess Capital includes policyholder and certain shareholder capital currently excluded under FSA rules from the calculation of IGD surplus at the PLHL level and is explained on page 43.
1 Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands 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.
Dividend per share
42p (2009: €0.17 per share)1
This is a measure of owner return. The Board's intention is to develop a progressive dividend policy subject to restrictions in the Group's two main credit agreements:
Analysis: The Board has recommended a final dividend of 21 pence per share. This brings the total dividend for the year to 42 pence. This dividend is due to be paid on 17 May 2011, subject to shareholder approval at the Company's AGM. A scrip dividend option will be available to shareholders.
Assets under management ('AUM')
£67.5bn
(2009: £66.9 billion)
Asset management IFRS operating profit
£46m
(2009 pro forma: £34 million)
For the IGNIS Asset Management segment, assets under management are a key driver of revenues:
Analysis: Total assets under management were stable, increasing by £0.6 billion to £67.5 billion2 . The increase was driven by positive market movements and net third party sales which offset the run-off of the closed life book.
IGNIS delivered a strong IFRS operating profit of £46 million, up 35 percent from 2009. The results benefited from improving markets as well as increased performance fees following revised fee arrangements with Phoenix Life. These new fee arrangements have been externally benchmarked and better align IGNIS' fee structure with Phoenix Life's objective of superior investment returns, thereby rewarding IGNIS for performance above the benchmark.
Definition and calculation: AUM represents all assets actively managed or administered by the asset management operations of the Group excluding the cash collateral managed through stock lending arrangements.
Gearing ratio
52%
(2009: 58%)
The gearing ratio is the Group's measure of its level of debt compared to its equity on an MCEV basis.
Analysis: The reduction in gearing reflects the prepayment of £122 million of debt in 2010 and the increase in the MCEV.
Definition and calculation: Gearing is calculated as net shareholder debt3 divided by the sum of Group MCEV, net shareholder debt and the present value of future profits of IGNIS.
Target: The Group is targeting a reduction in the gearing ratio to below 50% by the end of 2011.
Operating companies' cash generation
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 stable long-term cash flows for distribution to owners and for repayment of outstanding debt. Although investment returns are less predictable, some of the investment risk is borne by policyholders.
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 analysis of cash flows focuses on the Holding Companies' cash flows, 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, or used for the repayment of debt. This cash flow analysis reflects the cash paid by the operating subsidiaries to the Group's Holding Companies, as well as the uses of the cash receipts.
The Group has delivered cash flows from its operating subsidiaries of £734 million, including cash flows of £242 million from value enhancing management actions. Accelerated cash flows were achieved through improved asset liability matching, investment portfolio derisking, the resolution of legacy tax issues and fund restructurings.
| Holding Companies' cash flows | Year ended 31 December 2010 £m |
Year ended 31 December 2009 pro forma1 £m |
|---|---|---|
| Cash and cash equivalents | ||
| at 1 January | 202 | 86 |
| Operating companies' cash generation |
||
| Cash receipts from Phoenix Life2 |
708 | 695 |
| Cash receipts from IGNIS Asset Management |
26 | 21 |
| Total receipts of cash by Holding Companies3 |
734 | 716 |
| Uses of cash | ||
| Recurring cash outflows | ||
| Pension scheme | ||
| contributions | 38 | 33 |
| Other operating expenses | 45 | 27 |
| Debt interest | 123 | 102 |
| Shareholder dividend | 43 | – |
| Debt prepayment | 122 | – |
| Total recurring outflows | 371 | 162 |
| Non-recurring cash outflows | ||
| IT and other business | ||
| transformation costs | 30 | 67 |
| Transaction and | ||
| restructuring costs | 35 | 30 |
| Settlement with Royal | ||
| London | – | 240 |
| Debt interest | 6 | 72 |
| Pension scheme | ||
| contributions | – | 25 |
| Other Total non-recurring outflows |
8 79 |
4 438 |
| Total uses of cash | 450 | 600 |
| Cash and cash equivalents | ||
| at 31 December4 | 486 | 202 |
IFRS financial statements
MCEV supplementar y
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Phoenix Life remitted cash and cash equivalents of £708 million (2009 pro forma: £695 million) from its opening free surplus and current year surplus emergence and capital releases. This strong cash generation coupled with higher cash flows from IGNIS Asset Management of £26 million (2009 pro forma: £21 million) exceeded the Group's 2010 cash generation target of £625 to £725 million.
The chart above analyses the movement in free surplus of Phoenix Life which represents the life companies' free surplus plus the IFRS net assets of the service companies.
The life companies' free surplus is the excess of the net worth over the required capital reflected in the MCEV and represents capital in excess of what is required under the life companies' capital policies.
Movements in capital requirements and policy include the benefits of value enhancing management actions relating to investment portfolio derisking, fund restructurings and the resolution of legacy tax issues.
Included in valuation differences and other is a benefit of £125 million from the value of liquidity premiums expected to be earned following the restructuring of a portfolio of corporate bonds. These liquidity premiums are not recognised under IFRS.
The Group operates two main staff pension schemes, the PGL Pension Scheme and the Pearl Group Staff Pension Scheme. The triennial valuation of the PGL Pension Scheme completed in the second half of 2010 and a new funding arrangement has been agreed. The new funding arrangement will result in additional contributions of £160 million being paid to the scheme over an 8-year period from 2010. Additional contributions in 2010 of £45 million were largely recovered from certain of the Group's with-profits funds in line with the indemnity provided in 2005 and are not, therefore, reflected in this cash flow analysis. The additional contributions of £115 million from 2011 will be funded by the Holding Companies. There have been no changes to the underlying funding arrangements for the Pearl Group Staff Pension Scheme; however, completion of the 2009 triennial valuation has enabled the Trustee to establish the payments due between 2020 and 2027 under the 2009 funding agreement. Information on these payments is included in note 32 of the IFRS financial statements.
Other operating expenses include Group functions' costs. The increase in operating expenses in 2010 reflects the ongoing costs from having a Premium Listing and the reallocation of certain functional costs from operating companies to Group.
1 Represents differences between IFRS valuation of assets and liabilities and valuation for capital purposes.
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Debt servicing cash outflows were £123 million in 2010 comprising £96 million of interest on bank debt and associated swaps and £27 million in recurring coupons on the Tier 1 Bonds.
The 2010 Tier 1 coupon of £33 million was paid in April 2010. £6 million of this coupon payment is non -recurring due to the subsequent 15 percent reduction in the face value of the Bonds and the purchase of Bonds from an external party. The 2009 deferred Tier 1 coupon was paid through funds raised from the placing of 5 million Phoenix Group Holdings shares and is not therefore reflected in the cash flow analysis.
The shareholder dividend of £43 million comprises the payment of the 2009 final and 2010 interim dividend.
£122 million voluntary debt prepayments were made in respect of one of the Group's main credit facilities in 2010. Scheduled repayments of the Group's main facilities commence in 2011.
The Group's Holding Companies incurred IT and other business transformation costs of £30 million in 2010, including costs associated with the Group's transformation programme with its outsourcers. Business transformation costs are expected to reduce going forward as the investment programmes complete.
Transaction and restructuring costs include cash payments related to the Premium Listing, Tier 1 Bond restructuring and consent fees paid to the lending banks for various internal restructurings and corporate activity.
The Group is targeting operating companies' cash generation of £3.2 billion for the period from 2011 to 2016:
| Sources of future cash flows | 1 January 2011 to 31 December 2016 £bn |
|---|---|
| 1 Emergence of surplus |
1.5 |
| 1 Release of capital |
1.4 |
| Recurring cash receipts generated by life companies 2 Other |
2.9 0.3 |
| Operating companies' cash generation |
3.2 |
1 Includes cash flows from management actions.
2 Includes cash flows from IGNIS and management services.
£750 million to £850 million of these cash flows are expected to be generated in 2011.
The resilience of the cash generation target is demonstrated by the following stress testing:
| Stress testing | 1 January 2011 to 31 December 2016 £bn |
|---|---|
| Base case 6-year projections | 3.2 |
| 20% fall in equity markets | 3.0 |
| 15% fall in property values | 3.1 |
| 75 bps increase in yields | 3.2 |
| 3 Credit spreads widening |
2.9 |
| Combined stress of 25% fall in equity markets, 20% fall in property, 75 bps increase in yields |
|
| 3 and credit spreads widening |
2.3 |
3 10 year term: AAA – 48bps, AA – 77bps, A – 108bps, BBB – 162bps.
One-off shocks would be expected to lead to a deferral of cash emergence rather than a permanent diminution.
The Board is pleased to report that embedded value performance was strong reflecting the resilience of Phoenix Life and the realisation of significant value from management actions. The Group has delivered growth in embedded value from management actions of £296 million, exceeding the 2010 target of £145 million.
The Group generated MCEV operating earnings after tax of £543 million in 2010, an increase of £156 million on the 2009 pro forma period (on a consistent basis).
| MCE V operating earnings |
Year ended31 December 2010 £m |
Year ended31 December 2009 pro forma £m |
Adjustment to move to a longer term rate of return3 £m |
Year ended31 December 2009 on a consistent basis £m |
|---|---|---|---|---|
| Life MCEV operating earnings2 Management services |
758 | 380 | 164 | 544 |
| operating profit IGNIS Asset Management operating |
20 | 14 | – | 14 |
| profit | 46 | 34 | – | 34 |
| Group costs | (70) | (54) | – | (54) |
| Group MCEV operating earnings before tax Tax on operating |
754 | 374 | 164 | 538 |
| earnings | (211) | (105) | (46) | (151) |
| Group MCEV operating earnings |
||||
| after tax | 543 | 269 | 118 | 387 |
2 Life MCEV operating earnings are 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. Life MCEV operating earnings before tax of £758 million (2009 pro forma: £380 million) is therefore calculated as £546 million operating earnings (2009 pro forma: £273 million) grossed up for tax at 28 percent (2009 pro forma: 28 percent).
3 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns.
Other than vesting annuities and increments to existing policies, the Group's life companies are closed to new business. The principal underlying components of its operating earnings are therefore the expected existing business contribution together with non-economic experience variances and assumption changes.
| Life MCE V operating earnings after tax |
Year ended31 December 2010 £m |
Year ended31 December 2009 pro forma £m |
|---|---|---|
| Expected existing | ||
| business contribution | 306 | 95 |
| New business value | 19 | 22 |
| Non-economic experience variances and assumption changes |
||
| Experience variances | 264 | 62 |
| Other operating variances | (5) | 21 |
| Assumption changes | (38) | 73 |
| Total non-economic experience variances and |
||
| assumption changes | 221 | 156 |
| Life MCEV operating | ||
| earnings after tax | 546 | 273 |
The Group uses long-term investment returns in calculating the expected existing business contribution. From 2010, the Group has moved to calculating the expected contribution using a long-term risk-free rate (15-year gilt rate plus 10 basis points) plus long-term expectations of excess investment returns. The Group considers that an average return over the remaining term of the in-force business is more appropriate than a short-term rate and more consistent with its expectation of longer term rates of return.
This change in assumption only affects the analysis of movement and does not impact the total calculated embedded value. The pro forma expected contribution in 2009 would have been £118 million higher if it had been calculated using expectations of longer term rates of return but economic variances within the analysis of Group MCEV earnings would have been reduced by the same amount.
1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 in the MCEV supplementary information.
The asset management and management services 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.
The expected contribution in 2010 of £306 million after tax is £93 million higher than the contribution in 2009 (2009 pro forma: £213 million on a consistent basis) largely due to the increase in the long-term risk-free rate and the higher opening MCEV.
New business profits generated from vesting annuities during 2010 were £19 million after tax (2009 pro forma: £22 million).
The new business margin is 5 percent after tax (2009 pro forma: 5 percent) 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 increased the MCEV by £221 million after tax in 2010, the main driver being positive experience variances.
Experience variances include a benefit of £139 million from the restructuring of a £1.2 billion portfolio of corporate loans, primarily from the liquidity premium expected to be earned following this restructuring. Experience variances also include £78 million from converting intragroup debt into listed Eurobonds, which are exempt from UK withholding tax, and other benefits from managing the back book. Negative assumption changes were driven by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
Favourable assumption changes in 2009 largely related to the 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 £20 million in 2010 compared to a pro forma operating profit of £14 million in 2009.
IGNIS performed well in 2010 with operating profit increasing 35 percent to £46 million (2009 pro forma: £34 million). The higher operating profits reflect stronger markets and higher performance fees following revised fee arrangements with Phoenix Life.
| IGNIS Asset Management operating profit |
Year ended 31 December 2010 £m |
Year ended 31 December 2009 pro forma £m |
|---|---|---|
| Third party1 | 29 | 29 |
| Life fund revenue2 | 115 | 82 |
| Total revenues3 | 144 | 111 |
| Staff costs | (59) | (49) |
| Other operating expenses | (39) | (28) |
| Total expenses | (98) | (77) |
| IGNIS Asset Management | ||
| operating profit before tax | 46 | 34 |
1 Includes performance fees of nil (2009 pro forma: £3 million). 2 Includes performance fees of £35 million (2009 pro forma:
£1 million).
3 Revenues are stated net of rebates from collective investment schemes.
The new fee arrangements with Phoenix Life have been externally benchmarked and better align the fee structure with Phoenix Life's objective of superior investment returns, thereby rewarding IGNIS for performance above the benchmark. Strong investment performance supports policyholder persistency in Phoenix Life and improves cash generation. Looking forward, the new fee arrangements will potentially bring greater variability to IGNIS' operating profit as the base fees have been reduced in exchange for the potential for greater performance fees.
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The increase in staff costs has been mainly driven by the increased cost of and investment in Corporate and Investment Management resources.
Assets under management increased by £0.6 billion to £67.5 billion at 31 December 2010, as shown above3 .
Internal funds under management decreased by £0.1 billion to £60.0 billion in the year as positive market movements of £5.3 billion almost fully offset the run-off of the closed life business of £5.4 billion.
Third party net sales were £1.3 billion (2009 pro forma: £0.4 billion) for the year reflecting strong sales of liquidity funds and retail products.
Costs relating to Group functions amounted to £40 million before tax (2009 pro forma: £20 million), the balance of the charge in both periods relates primarily to the pension schemes. The increase in Group costs reflects the ongoing costs from having a Premium Listing and the reallocation of certain functional costs from operating companies to Group.
Group MCEV earnings are reconciled to the Group MCEV operating earnings, as follows:
| Year ended 31 December 2010 £m |
Year ended 31 December 2009 pro forma £m |
Adjustment to move to a longer term rate of return4 £m |
Year ended 31 December 2009 on a consistent basis £m |
|
|---|---|---|---|---|
| Group MCEV | ||||
| operating earnings after tax |
543 | 269 | 118 | 387 |
| Economic | ||||
| variances on | ||||
| covered business5 | 101 | 701 | (164) | 537 |
| Economic variances on non-covered business Other non operating |
(38) | (245) | – | (245) |
| variances on covered business |
(54) | 9 | – | 9 |
| Non-recurring | ||||
| items | (75) | (87) | – | (87) |
| Gain on debt refinancing |
– | 491 | – | 491 |
| Finance costs | ||||
| attributable to owners |
(168) | (390) | – | (390) |
| Tax on non | ||||
| operating earnings | (54) | (197) | 46 | (151) |
| Group MCEV earnings after tax |
255 | 551 | – | 551 |
4 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns.
5 Covered business includes all long term insurance business written by the Group, but excludes the asset management and management service companies.
Positive economic variances reflect changes in interest rate yields, favourable equity movements and strong returns on hedge funds.
2010 was impacted by an increase in the market value of the listed Tier 1 Bonds which reduced MCEV earnings by £40 million before tax (2009 pro forma: £169 million).
Other non-operating variances on covered business include regulatory change and systems transformation costs and the costs of a risk transfer payment which brings the two service companies' outsourcing models more in line with each other. These costs were partly offset by a gain on finalising the revised asset shares in the PALAL with-profit fund as a result of a guaranteed annuity option compromise scheme last year which reduced longevity risk for the Group whilst providing policyholder benefit enhancements.
Overall non-recurring items reduced embedded value by £75 million before tax (2009 pro forma: £87 million before tax). Non-recurring items primarily relate to Premium Listing and other restructuring costs, including site rationalisation and outsourcer transformation.
As part of their acquisition by Phoenix Group Holdings, the Pearl businesses refinanced their external borrowings in 2009 resulting in an overall net reduction of £491 million. In addition, the remainder of the £2.9 billion of this external debt was also restructured and the terms amended.
| Year ended 31 December 2010 £m |
Year ended 31 December 2009 pro forma £m |
|
|---|---|---|
| 1 Debt finance costs |
102 | 176 |
| Debt issue costs | – | 202 |
| Tier 1 coupon | 66 | – |
| Other finance costs | – | 12 |
| Finance costs attributable to owners |
168 | 390 |
1 Finance costs in respect of the Impala and Pearl facility agreements (and associated swap interest) and the Royal London Payments in Kind ('PIK') notes and facility.
Debt finance costs reduced by 42 percent on the pro forma comparative period as a result of the above mentioned restructuring and lower interest rates.
The Group paid the 2010 coupon on the Tier 1 Bonds on 26 April 2010. The 2009 deferred Tier 1 Bond coupon of £33 million was paid in November 2010 through funds raised from the placing of 5 million Phoenix Group Holdings shares.
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The Group MCEV increased by £277 million over the year to £2,104 million at 31 December 2010 as shown below. The increase was mainly due to MCEV earnings generated in the year of £255 million.
| Year ended31 | Year ended31 | |
|---|---|---|
| Movement in Group MCE V |
December 2010 £m |
December 2009 £m |
| Group MCEV at 1 January | 1,827 | 1,044 |
| Group MCEV earnings after tax |
255 | 551 |
| Other comprehensive | ||
| income | ||
| Actuarial gains/(losses) on defined benefit |
||
| pension scheme | 27 | (14) |
| Exchange differences on | ||
| translating foreign operations | – | (44) |
| 27 | (58) | |
| Capital and dividend flows | (5) | 290 |
| Group MCEV at | ||
| 31 December | 2,104 | 1,827 |
Exchange differences on translating foreign operations have not occurred in 2010 as Phoenix Group Holdings changed its functional currency to sterling in the second half of 2009.
Capital and dividend flows in 2010 mainly comprise external dividend payments in cash of £43 million partly offset by an issue of share capital of £33 million related to the 2009 deferred Tier 1 Bond coupon.
The Group has delivered a strong performance, generating an IFRS operating profit of £373 million (2009 pro forma: £457 million), demonstrating both its ability to deliver high quality returns for shareholders and the strength of its business model.
| Group operating profit | Year ended 31 December 2010 £m |
Year ended 31 December 2009 pro forma £m |
|---|---|---|
| Phoenix Life | 388 | 469 |
| IGNIS Asset Management | 46 | 34 |
| Group costs | (61) | (46) |
| Operating profit before tax1 | 373 | 457 |
1 Operating profit is presented before adjusting items.
Operating profit for Phoenix Life 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 (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the longer term investment return are set out in note 5 to the IFRS consolidated financial statements.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
| Phoenix Life operating profit | Year ended31 December 2010 £m |
Year ended31 December 2009 pro forma £m |
|---|---|---|
| With-profit | 55 | 49 |
| With-profit where internal capital support provided Non-profit and unit-linked Longer term return on |
(7) 278 |
20 331 |
| owners' funds | 42 | 55 |
| Management services | 20 | 14 |
| Phoenix Life operating profit before tax |
388 | 469 |
The owners' one-ninth share of the policyholder with-profit bonus of £55 million increased by 12 percent on the result for the comparative pro forma period of £49 million as bonus rates improved following better market conditions.
The with-profit funds where internal capital support has been provided experienced an operating loss of £7 million (2009 pro forma: £20 million operating profit). The 2010 result was negatively impacted by a reduction in assumed surrender rates in funds with valuable policyholder guarantees.
The operating profit on non-profit and unitlinked funds was £278 million (2009 pro forma: £331 million). This includes margin emergence of £168 million (2009 pro forma: £154 million), return on surplus assets of £18 million (2009 pro forma: £9 million) and new business from vesting annuities of £22 million (2009 pro forma: £35 million). The 2009 pro forma result also benefited from positive longevity assumption changes of £139 million.
The longer term return on owners' funds for 2010 of £42 million reflects the asset mix of owners' funds: primarily cash based assets and fixed interest securities. The return has decreased from the comparative pro forma period due to lower returns on cash given the continuing low interest rate environment. Returns on cash are not normalised.
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The operating profit for management services of £20 million (2009 pro forma: £14 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.
Operating profit of the asset management business increased from the pro forma comparative period by 35 percent to £46 million. The results benefited from stronger markets and higher performance fees from the life companies. Further information on the results of IGNIS Asset Management is included in the Group performance – MCEV section.
Costs relating to Group functions amounted to £40 million before tax (2009 pro forma: £20 million), the balance of the charge in both periods relates primarily to the pension schemes. The increase in Group costs reflects the ongoing costs from having a Premium Listing and the reallocation of certain functional costs from operating companies to Group.
IFRS profit after tax is reconciled to operating profit, as follows1 :
| Year ended 31 December 2010 £m |
|
|---|---|
| Operating profit before | |
| adjusting items | 373 |
| Investment return variances and | |
| economic assumption changes | |
| on long-term business | 18 |
| Variance on owners' funds | 19 |
| Amortisation of acquired in-force | |
| business and other intangibles | (150) |
| Non-recurring items | (139) |
| Profit before finance costs | |
| attributable to owners | 121 |
| Finance costs attributable to owners | (115) |
| Profit before the tax attributable | |
| to owners | 6 |
| Tax credit attributable to owners | 74 |
| Profit for the period attributable | |
| to owners | 80 |
Overall, the Phoenix Life business had favourable investment return variances and economic assumption changes of £18 million in 2010, which reflects strong returns on investments in hedge funds and property partly offset by changes in interest rate yields, leading to lower discount rates on non-profit liabilities.
1 Pro forma comparatives are not provided on the basis that it is inappropriate to pro forma acquisition balance sheet adjustments, for example, amortisation of acquired in-force business and other intangibles and debt finance costs following the associated debt restructure.
The favourable variance on owners' funds of £19 million for 2010 mainly relates to fair value gains on interest rate swaps held in the shareholder fund partially offset by losses on interest rate swaps held in the Holding Companies.
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 £132 million. Amortisation of other intangible assets totalled £18 million in the period.
Non-recurring items include:
| Year ended 31 December 2010 £m |
|
|---|---|
| 1 Debt finance costs |
102 |
| Other finance costs | 13 |
| Finance costs attributable to owners |
115 |
1 Finance costs in respect of the Impala and Pearl facility agreements (and associated swap interest) and the Royal London PIK notes and facility.
The Company is exempt from tax in the Cayman Islands on any profits, income, gains or appreciations for a period of 30 years from 11 May 2010 (the previous exemption was for 20 years from 15 January 2008).
With effect from the acquisition of the Pearl businesses in the third quarter of 2009 the Company has been managed and controlled from Jersey, where its permanent office premises are located. As a Jersey resident holding company the Company is 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 subsidiaries, excluding Opal Re, have their centre of operations.
The Group tax credit for the year attributable to owners is £74 million despite profits (after policyholder tax) of £6 million. This reflects the benefit of tax losses crystallised on the restructuring of the Group's life insurance businesses and the effect of non-taxable dividend income.
The Group has significant excess tax losses and expenses at the end of the year which have not been recognised in full.
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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 these 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 the Group Holding Companies ensures sufficient liquidity to meet creditor obligations and dividend expectations. This is monitored at both executive and Board level.
Targets are established in relation to regulatory capital requirements, liquidity and debt ratios and are used in managing capital in accordance with the Group's risk appetite and the interests of its stakeholders.
The capital policy of each life company is set and monitored by each life company Board. 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 maintain sufficient capital at all times to meet the regulatory capital requirements mandated by the FSA1 . These measures are aggregated under the European Union Insurance Groups' Directive ('IGD') as implemented by the FSA, to calculate regulatory capital adequacy at a Group level.
The Group's IGD assessment is made at the level of the highest EEA insurance group holding company, which is Phoenix Life Holdings Limited ('PLHL'), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 31 December 2010 is £1.0bn (2009: £1.2bn). The components of the estimated IGD calculation are shown below:
| 31 December 2010 £bn |
31 December 2009 £bn |
|
|---|---|---|
| Group capital resources ('GCR') |
5.3 | 5.0 |
| Group capital resource requirement ('GCRR') |
(4.3) | (3.8) |
| IGD surplus (estimated) | 1.0 | 1.2 |
| Coverage percentage | 123% | 132% |
The key drivers of the change in solvency position in the year are:
1 Further details on the regulatory capital requirements of the individual life companies are included within note 42 of the IFRS financial statements.
IGD surplus is relatively insensitive to market movements
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The Group's capital policy, which is agreed with the FSA, is to maintain GCR at the PLHL level of:
The policy was revised in 2010 from the previous policy of maintaining 125 percent of the capital resource requirement, to mitigate the anomalies of market movements on the WPICC. The headroom over the new policy is £0.1 billion (2009: £0.4 billion).
The court sanctioned funds transfer of the PALAL business into PLL was effective from 1 January 2011. This increased the headroom to £0.2 billion as at 1 January 2011.
IGD Excess Capital represents a more realistic measure of the capital strength of the Group as it includes policyholder and certain shareholder capital which is currently excluded under FSA rules from the PLHL Group's IGD surplus calculation. This capital provides the Group with financial flexibility and is available to protect policyholders and shareholders from adverse events as demonstrated by the insensitive nature of the IGD surplus to market stresses.
The excluded capital relates to:
At 31 December 2010 the IGD Excess Capital was £2.8 billion (2009: £3.1 billion) as shown below:
| 31 December 2010 £bn |
31 December 2009 £bn |
|
|---|---|---|
| IGD Excess Capital | 2.8 | 3.1 |
| Restricted assets | (0.4) | (0.6) |
| Excess policyholder capital | (1.4) | (1.3) |
| IGD surplus | 1.0 | 1.2 |
| Coverage percentage on IGD Excess Capital |
170% | 191% |
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 our target in a range of reasonably foreseeable circumstances. The results of that stress testing are provided below:
| 1 January 2011 IGD surplus £bn |
1 January 2011 IGD Excess Capital £bn |
|
|---|---|---|
| Estimated IGD surplus/ | ||
| Excess Capital: | 1.0 | 2.8 |
| Following a 20% fall | ||
| in equity markets | 1.0 | 2.4 |
| Following a 15% fall | ||
| in property values | 1.0 | 2.7 |
| Following a 75 bps | ||
| parallel increase in yields | 1.0 | 2.8 |
| Following a 75 bps | ||
| parallel decrease in yields | 0.9 | 2.7 |
| Following credit | ||
| spread widening1 | 0.9 | 2.5 |
| Following a combined | ||
| 25% fall in equity markets, | ||
| 20% fall in property, 75 bps | ||
| increase in yields and | ||
| credit spreads widening1 | 0.9 | 1.8 |
1 AAA – 100bps, AA – 113bps, A – 120bps, BBB – 153bps, BB – 370bps, B – 613bps.
It is anticipated that 2011 will be a key year in the development of Solvency II with the European Commission expected to release Level 2 implementing measures in June and consultation on the Level 3 guidance expected to commence soon after. The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums.
The Group has a well established Solvency II programme and has continued to progress development towards meeting the Solvency II requirements. The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria ('PAQC') template in 2010. The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment ('ORSA').
Between July and November 2010, the European Commission undertook Quantitative Impact Study 5 ('QIS5'), a European-wide exercise supporting development of the Solvency II level 2 implementing measures. The Group participated fully in this exercise recognising it as an important step in assessing the Group's readiness for Solvency II.
The primary sources of capital used by the Group are equity, perpetual reset capital securities and subordinated debt.
In managing capital the Group seeks to optimise the level of debt in its balance sheet. The Group's closed book business model allows it to operate with higher leverage than other life companies that are still writing new business, as it does not need to fund upfront capital requirements and new business acquisition expenses.
The Group has net shareholder debt of £2,733 million (2009: £3,080 million). The gearing ratio1 is 52% (2009: 58%) based on IGNIS PVFP of £0.4 billion (2009: £0.4 billion).
Shareholder debt (including hybrid debt) at 31 December 2010:
| 31 December 2010 £m |
31 December 2009 £m |
|
|---|---|---|
| Bank debt at face value | ||
| – Pearl facility | 425 | 425 |
| – Pearl loan notes | 76 | 75 |
| – Impala facility | 2,138 | 2,260 |
| – Royal London PIK notes and facility |
106 | 102 |
| Tier 1 Bonds at market value | 304 | 264 |
| PLL subordinated debt at market value |
170 | 156 |
| Shareholder debt (including hybrid debt)2 |
3,219 | 3,282 |
| Holding Company cash and cash equivalents |
(486) | (202) |
| Net shareholder debt | 2,733 | 3,080 |
Further detail on shareholder debt is included in note 22 to the IFRS financial statements.
The Group has two main credit agreements (the Pearl and Impala facilities), separately secured on the shares of two separate sets of companies. Although the current debt carries favourable interest rates and is tax efficient it is of relatively short duration and the covenants and structure can create some inflexibility in achieving the Group's objectives.
The Group intends to improve operational and financial flexibility through a targeted reduction in the gearing ratio to below 50 percent by the end of 2011, a level consistent with the relative stability of the cash flows in the Group's closed book business model.
Details of the Group's objectives and policies for the management of liquidity risk are included within the Risk management section and note 43 of the IFRS financial statements.
Risk management is a core component of the Group's strategic agenda. The Board seeks to ensure that the Group identifies and manages all risks accordingly; to either create additional value for its stakeholders or to mitigate any potentially adverse effects.
A Group-wide 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. 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. A summary of the key risks and uncertainties facing the Group is provided on page 47. relevant Boards and Board Committees. Risk management
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 the PLHL ExCo is in place.
The Group Board Risk Committee has responsibility for the oversight of risk across the Group. The Group Board Risk Committee comprises five Non-Executive Directors and met five times during the year. The Committee is supported by the Group Chief Risk Officer, Jean Park.
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
Each committee has formal terms of reference which are approved by the relevant divisional Executive team. Overall reporting of risk management and escalation of emerging issues is undertaken through divisional management committees to the PLHL ExCo and reported to the PLHL and Group Boards via regular risk reporting.
The Group's risk management framework is underpinned by its governance model which includes statutory boards and their committees, management committees, 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 and targets that articulate the risk appetite of the Group Board with respect to policyholder security, earnings volatility, liquidity and regulatory compliance.
By the end of the year the Group had strengthened this framework to include appetite statements and targets for individual risks against which assurance and capacity reporting will be provided to the relevant Boards in 2011.
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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 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 their financial impact.
A Group-level risk assessment process determines the most significant risks to the Group and the options available for their management. The Board Risk Committee receives a Consolidated Risk Report on a quarterly basis, detailing the risks facing the Group within each of the Group's main risk categories (Strategy, Market, Credit, Insurance, Financial Soundness and Operational). Regular risk reporting is provided to the Boards, PLHL ExCo and the respective divisional oversight committees.
The Group Chief Risk Officer manages the Group risk function and has responsibility for the implementation and oversight of the Group's overall risk management framework. The Group risk function has responsibility for financial and operational risk, risk governance, FSA relationship management and regulatory risk. Risk review functions across the Group manage the framework in line with the Group 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. During the course of the year work has been undertaken to enhance the Group's existing policy suite and update the policy framework in support of the broader enhancements to the Risk Management Framework.
The policies define:
Each policy is the responsibility of a member of the PLHL 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 its lending syndicate. In the event that transfers from the Group's insurance and investment management subsidiaries are limited by any law, regulatory action or change in established approach, 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 |
The Group puts considerable efforts into managing relationships with its regulators so that it is 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. |
of their security rights over Group companies. 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 reinsurance 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 financing for any acquisitions. |
The Group is well positioned to be the natural consolidator for closed funds and maintains an ongoing dialogue with potential vendors. |
Performance
Governance
Corporate responsibilit
Corporate responsibility
"Companies carry responsibilities that lie beyond the balance sheet, the bottom line and the dividend. But the discharge of those responsibilities can be positively aligned to success in the delivery of conventional financial metrics. This is because taking responsibility – for the treatment of our people, the environment, the communities in which we live and work and the way in which we deal with customers and all our counterparties – builds trust which is the basis of a successful and sustainable business."
Clive Bannister, Group Chief Executive Officer
At Phoenix Group, responsible behaviour is embedded into our culture. We manage £67.5 billion of assets and have over six million customers relying on us to look after their money and to be there when they need us. We recognise the difference that we can make to people's lives and we seek to inspire confidence among all our stakeholders.
We have established a Corporate Responsibility programme which focuses on our internal and external stakeholders as well as our environmental footprint.
During 2010 we reviewed our Corporate Responsibility activities and have established a programme that will be built on in 2011 and beyond. Our programme recognises that our commitment to responsibility in the management of our business will help to create long-term value.
We also recognise that a responsible approach to stakeholders including the way we provide customer service, build employee engagement and develop investor and media relations will directly enhance our ability to succeed. Investment in corporate responsibility is an opportunity for our business, creating value by enhancing trust.
During 2010 we joined Business in the Community ('BITC'), which is a business-led charity offering advice and support to its members on how to create a sustainable future for our people, the planet and how to improve business performance. We look forward to continuing this work with BITC during 2011, to articulate further what this responsibility looks like in our workplace, and for external stakeholders, our community and the environment.
Our Corporate Responsibility activity focuses on four areas of activity in which value is created:
Workplace – We know from surveys that our people have a strong moral conscience and real concern for the environment and those less fortunate than themselves. Every element of our Corporate Responsibility activity makes us more attractive as an employer and so adds value through its role in the motivation, retention and recruitment of the best talent.
In the workplace itself, our Corporate Responsibility approach defines how we behave towards our people and how we prioritise their development.
External Stakeholders – The way we deal with external stakeholders creates value by developing trust, respect and support for our business objectives. Failure causes reputational damage which poses risks to our ability to execute our strategy. Dealing with our external stakeholders responsibly, with integrity and transparency, not promising more than we can reasonably expect to deliver and keeping our word are the cornerstones of reputation and our approach. Our activity aims to embed these behaviours within our culture.
Our approach extends to the way we deal with governance and risk management issues, and how we manage our relationships with customers, shareholders and other investors or suppliers of capital, outsource and other business partners and suppliers of goods and services, regulators, legislators and the media.
Community – Our approach to community governs the contribution we make to the community in which our employees and customers live and work, and our obligations to broader society. This approach creates value through increased employee engagement and enhanced corporate reputation.
Environment – Our approach to environmental matters is defined by our commitment to monitoring and reducing the environmental footprint of our business. This approach also contributes to the sum of employee engagement and increasingly, to our attractiveness as a potential employer. "Our aim is to create a fulfilling working environment – based on our ethos of learning, innovation, fairness and commitment – in which every individual can excel and make a real difference."
Employee metrics
Alan Jones, Group HR Director
The Phoenix approach to Corporate Responsibility is embedded in our Corporate Governance and Corporate Responsibility policies, both of which are sponsored by the Group Chief Executive Officer.
There is a Group-wide, cross-functional working group, which makes recommendations on the discretionary activities that it believes will have the biggest impact on our stakeholders. Members of the working group are individually accountable for the delivery of specific activities and for reporting.
The Group employs around 1300 staff, split across Phoenix Life, IGNIS and Group.
Our people are our most important asset and they are vital to the success of our business. Building an engaged, productive workforce provides significant opportunities to enhance our business performance, benefiting customers, shareholders and employees alike.
The Human Resources function has continued to monitor employee metrics around turnover, sickness and training during 2010. Whilst the turnover figures for employees leaving voluntarily (see table below) are up on previous years' values, they are better than the industry benchmark of 11.9 percent. The 2009 figure for voluntary leavers was lower, though this may have been due to the extensive redundancy programme being operated as a result of the integration of our Life Company Glasgow and Peterborough offices into Wythall.
At least 13 percent of our workforce is of 'non-white British' origin. This supports our aim to be a 'best place to work' with a reputation for giving real effect to our wide ranging equal opportunity policies.
| Staff Turnover | |||||||
|---|---|---|---|---|---|---|---|
| (employees choosing to leave voluntarily) |
9.9% | 3.8% | 5.8% | ||||
| Annual New Starter Turnover (number of |
|||||||
| employees leaving | |||||||
| voluntarily within 12 months of starting) |
13.0% | 7.3% | 10.3% | ||||
| Percentage of days lost through sickness |
1.3% | 1.6% | 1.5% | ||||
| Percentage of employees |
|||||||
| sponsored on a | |||||||
| professional qualification |
17.4% | 21.1% | N/A | ||||
| We believe that an engaged workforce delivers |
Measure 2010 2009 2008
improved customer experience and drives strong business performance which delivers shareholder value. One way we measure employee engagement is through our annual staff survey. In 2010 we extended this survey to employees within IGNIS. 93 percent of those working in Phoenix Life and Group and 76 percent of those in IGNIS completed the survey. Key themes arising from the survey included:
Our people are our most important asset and we have demonstrated strong employee engagement scores compared to both our target and the Financial Services benchmark.
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Business and strategy
Performance
Corporate responsibility
"The reason we come to work in the mornings is to provide 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
Our ability to attract and retain the best and most talented people represents a key non-financial risk for the Group. We have therefore developed a wide range of HR policies and data reporting disciplines to help mitigate any risk.
The Group recognises the responsibility we have to our six million customers, as both custodian of their financial assets and supplier of their pension needs and life cover. Our Treating Customers Fairly ('TCF') Strategy is at the heart of our business, and all staff, regardless of where they work, are fully aware of the importance of TCF. The Group is committed to the highest standards of compliance and has robust risk management and governance architectures in place. The TCF models and reporting are well established and Group-wide with positive interaction between the Group and the FSA.
Our TCF proposition is:
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Through a regular programme of surveys and one-to-one interaction with our customers, we are able to gain a better understanding of customer expectations, and identify any areas of improvement that are required first hand. Our aim is to provide a responsible, fair and helpful service. As a Group we recognise that sometimes things will go wrong, or that our customers may be unhappy with an element of their product or service. We take all complaints seriously, and have introduced several new measures this year which we will track going forward. We also intend to identify and learn from our root cause analysis, which we will continue to develop in 2011.
Our monthly customer satisfaction telephone survey for 2010 produced the measure of 4.5 out of a possible 5, where customer satisfaction was reported as at least 'good'. This compares to 4.3 in 2009. Any customer feedback is analysed and where a number of customers report similar experiences, or a trend is identified, these are reviewed internally to identify whether any changes or improvements are required. Our annual statement communication is in the process of being streamlined, as customers made us aware that our communication pack was too detailed and lengthy.
The Group participated in the Association of British Insurers' ('ABI') Customer Impact Scheme for the fifth year. A copy of our 2010 report on customer impact will shortly be available on our website www. thephoenixgroup.com/customer-support.
We set out to maintain and improve customer outcomes during 2010. One example of this is that we have improved the cycle of mailings for one million customers. They now receive their communications three months earlier than previously, following our bonus declaration announcement. This helps provide our customers with information in a timely manner, allowing them sufficient time to make informed decisions.
We have continued to support the ABI and industry-backed Origo 'Options' service, originally launched in 2008, to speed up the processing and payment of Open Market Options, and Immediately Vesting Personal Pension transfers. Our Phoenix, Pearl, NPI and London Life books of business started to be included in this initiative from April 2009. We are pleased to report that our processing times have significantly reduced since going live with this process, following a number of internal initiatives to utilise fully the 'Options' capability. Across the Group, and for the second half of 2010, the average elapsed time for receipt of funds by receiving providers was around 9.5 calendar days. This is in line with the industry average of those providers who are also signed up to using the 'Options' service. During 2011, we aim to review and further improve the time taken to make a claim and process transfers, building on the 'Options' service success. In addition we are hoping to include non-maturing Pension-to-Pension transfers under the 'Options' mechanism.
We developed an enhanced 'customer proposition' in 2010, which takes into account industry best practice, and the needs of all our stakeholders internal and external. We wanted to ensure that our customer offering is high quality in terms of the service we provide, the products we offer, and the policy returns that are generated from a closed life book. Our customer retention activity has been extended to involve a larger proportion of our customer base. We carefully select and work closely with third party providers to offer our customers products and services which we don't offer and that meet their needs.
Our commitment to customer service, which included a focus on improving customer outcomes, has resulted in even higher scores on our customer satisfaction survey than in 2009 .
Our customer research programme this year has focused on our complaints and claims processes, identifying key areas where we can improve further.
In February 2011 we published complaint handling results for the second half of 2010, on our Group website, for our Financial Services Authority ('FSA') regulated life companies. This is the second report we have published for this type of information, and we are keen to support the financial services industry's desire to provide customers with better access to information. Over the course of 2010, we received around 17,000 complaints. This equates to around 1.12 complaints per 1,000 customers. Reports for the first and second half of 2010 can be viewed on our website www.
Whilst low in volume relative to our number of transactions, we will continue to review our complaints process and, based on customer feedback, are looking to introduce a more personalised service during 2011.
We recognise that, with over six million customers and several million transactions every year, on occasion things can go wrong. We aim to fix any mistakes fully and meet our customers' expectations as quickly as we can. The 'number of complaints closed within 8 weeks' was 97 percent, which reflects our desire to close complaints quickly, to our customers' satisfaction.
We have introduced a target for the quality of complaint handling, which is to be at or below the industry average for Financial Ombudsman Service ('FOS') 'overturns' – where the Ombudsman finds in favour of the customer.
In September 2010, the FOS published data for the first half of 2010. We exclude banks from our definition of industry average (which made the target tougher) to enable a truer peer group comparison. 34 percent of Phoenix Life cases and 17 percent of Pearl Assurance cases were overturned by the Ombudsman compared to the peer group average of 35 percent, which meant that we achieved our target. We are very committed to improvement and we hope that the measures we have taken will reduce both the number of cases going to the Ombudsman and the proportion of those cases where the Ombudsman rules against us.
We make every effort to enter into responsible relationships with our suppliers and outsource service partners with the objective of achieving 'win:win' relationships. We aim to pay them promptly and to honour our commitments.
In 2011, we intend to review our procurement process to strengthen our policies to ensure that suppliers meet our standards of responsible and ethical behaviour.
We take our responsibility as an investor seriously. IGNIS Asset Management adheres to the UK Financial Reporting Council's Stewardship Code in making its investment decisions. We take our responsibilities as a shareholder of the companies in which we invest seriously, working to promote best practice in company management whilst always seeking to act in the best interests of clients.
As part of our stock picking process, we take into account any factor that might have a bearing on performance, including socially responsible investment issues.
Further information on the Stewardship Code and our approach to responsible investment is included on IGNIS' website www.ignisasset. com/institutional/our-approach/ stewardship-policy.
Performance
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We are committed to playing an active role in the wider community through supporting local initiatives and making charitable donations. We believe this commitment leads to greater employee engagement and is also attractive to potential employees, suppliers and customers.
The Group supports charitable causes in a number of different ways. In 2010 this included donations in recognition of employees giving their time to volunteer for charities, matching funds raised through employee fundraising efforts, as well as several small donations in response to requests – with priority given to charities based close to Group sites.
Other community activity during the year included a team of employee volunteers helping to set up a new baby hospice, and maintaining links with local schools.
The Group has various sponsorship opportunities in place, which helps generate awareness of our brands and shows our commitment to the society in which we work.
A total of £104,094 was donated by the Group for charitable purposes during the year. This included a donation made to the Alzheimer's Society at Christmas in respect of our decision to send e-cards this year.
Through fundraising activities organised at our offices, during the year our employees raised over £47,000 for their chosen charities.
Staff in our life companies organised a series of monthly charitable activities which encouraged team building and helped create a fun environment in which to work. Charity events included managers being sponsored to sleep rough, nearly 200 employees running a mile for Sports Relief and employees buying Christmas presents for patients at Birmingham Children's Hospital.
Meanwhile, IGNIS staff entered a team in the Women's 10k Road Race, raising funds for the cardiology unit at Yorkhill Children's Hospital in Glasgow.
We are committed to playing an active role in our wider community through supporting local initiatives. 2010 was the 14th 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.
We are aware that we owe it to our customers, suppliers and staff to be a responsible organisation, and look after the environment in which we operate. It is important for a firm such as ours, which does not have a major environmental footprint, to structure its activities in a manner proportionate to the nature of our business. Whilst we do not currently monitor our environmental impact as such, we are very much engaged in recycling and energy efficiency at all our sites. Where printed materials are used, we try to ensure we use sustainable supplies and engage with suppliers that mirror our commitment to the environment. The consolidation of our life company operations into our Wythall site has continued throughout 2010, which has helped to reduce our carbon footprint, as travel between sites, and energy consumption is reduced.
Our London office, which is a shared-use building, has been awarded a 'Gold Award' certificate, for the 2010 Clean City Awards Scheme, relating to achievements in waste management, waste minimisation, re-use and recycling initiatives.
For more information on the Group's Corporate Responsibility programme, please visit the corporate responsibility section of our website at www.thephoenixgroup.com/corporateresponsibility.
Our London office achieved a Gold Award Certificate for the 2010 Clean City Awards.
Strong and effective governance is crucial to our twin aims of delivering value to shareholders and policyholders.
The Board is committed to high standards of corporate governance. This section includes details of our application of the provisions of the Combined Code on Corporate Governance and profiles of our Board of Directors.
| In this section | |
|---|---|
| 58 | Board of Directors |
| 62 | Directors' report |
| 67 | Corporate governance report |
74 Remuneration report
Governance
Ron Sandler was appointed Chairman of the Company on 24 September 2009. He is additionally Chairman of Northern Rock plc and Ironshore Inc, and is an adviser to Palamon Capital Partners. Mr Sandler has an MA from Queens' College, Cambridge and an MBA from Stanford University. He was previously Chief Executive of Lloyd's of London and played a key role in the Lloyd's reconstruction and renewal programme. Subsequently, he was 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.
Clive Bannister joined the Group in February 2011 as Group Chief Executive Officer. Prior to this, he was Group Managing Director of Insurance and Asset Management at HSBC. Clive joined HSBC in 1994 and held various leadership roles in Planning and Strategy in the Investment Bank (USA) and was Group General Manager and CEO HSBC Group Private Banking. He started his career at First National Bank of Boston and prior to working at HSBC was a partner in Booz Allen Hamilton in the Financial Service Practice providing strategic support to financial institutions including leading insurance companies, banks and investment banks. Throughout his career he has lived and worked internationally. Mr Bannister was appointed to the Board of Directors of the Company on 28 March 2011.
Ron Sandler Clive Bannister Jonathan Yates Ian Cormack Charles Clarke Ian Ashken René-Pierre Azria Alastair Lyons Manjit Dale Isabel Hudson David Woods Hugh Osmond David Barnes Tom Cross Brown
Jonathan Yates joined the Group in May 2010 as Group Finance Director. Prior to working in the Phoenix Group, he was Chief Executive of Life Assurance Holding Corporation Limited ('LAHC') and its subsidiary Windsor Life (from 2004 to 2009). He also held other roles in the LAHC group including Finance Director and Development Director and successfully led a number of major transactions. Mr Yates is a qualified actuary and was appointed to the Board of Directors of the Company on 23 June 2010.
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, Deputy Chairman of Bovis Homes Group plc, and a Non-Executive Director of the Towergate Insurance Group. In his executive career he was Chief Executive Officer of the National Provident Institution, Executive Director of Abbey National, responsible for the insurance division, and Chief Executive Officer of the 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 Fortune 500 U.S. diversified consumer products company listed on the New York Stock Exchange. 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 is a Principal and Executive Officer of a number of private investment entities. He was appointed to the Board of Directors of the Company on 2 September 2009.
René-Pierre Azria is Chief Executive Officer of Tegris Advisors LLC, a U.S. private advisory firm specialised 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. conglomerate, 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. He 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. He is a member of the Board Audit and Board Remuneration Committees.
Charles Clarke is a Jersey-resident graduate 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 Island firm 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 (NED) 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. He is a member of the Board Audit Committee.
Ian Cormack is Non-Executive Chairman of Maven Income & Growth VCT 4 plc and is a Non-Executive Director of Bloomsbury Publishing Plc, 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 UK from 1997 to 2003. Prior to this, he spent 21 years with Lazard Brothers in London, latterly as Chief Executive Officer of Lazard Brothers Asset
Business and strategy
information
Management. Mr Cross Brown is Non-Executive Chairman of Just Retirement (Holdings) Limited, and a Non-Executive Director of Artemis Alpha Trust plc, as well as of other private companies and charities. Mr Cross Brown served on the Board of Directors of the former Pearl Group Limited from May 2005 until September 2009. He was appointed to the Board of Directors of the Company on 24 September 2009. He is 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. Mr Dale graduated from Cambridge University with an Honours Degree in Economics. 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 B V. Ms Hudson is a Non-Executive Director of QBE Insurance, MGM Advantage 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 30 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. She 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 UK'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. He was appointed to the Board of Directors of the Company on 2 September 2009. Mr Osmond is a member of the Board Risk Committee.
David Woods is a Fellow of the Institute of Actuaries and is currently Non-Executive Chairman of Royal Liver Assurance and a Non-Executive Director of Standard Life UK Smaller Companies Trust plc, Murray Income Trust plc and The Moller Centre for Continuing Education. He is also Chairman of the pension fund trustee companies responsible for the governance of all the UK pension schemes in the Steria Group and is a trustee of the Scottish Provident Pension Fund. Between 1988 and 2002, he was Group Managing Director of the Scottish Provident Group. He was appointed to the Board of Directors of the Company on 18 February 2010 and is Chairman of the Board Risk Committee.
The Company is incorporated in the Cayman Islands and Premium Listed on the London Stock Exchange, having de-listed from Euronext, Amsterdam, on 17 November 2010. The Company is not required to comply with the requirements of the UK Companies Act 2006. However, the Directors support these enhanced standards for disclosure and have sought to comply voluntarily with these requirements.
The UK Companies Act 2006 requires a company to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2010 including an analysis of the position of the Group at the financial year end, and a description of the principal risks and uncertainties facing the Group (known as a 'Business Review').
The information that fulfils the Business Review requirements can be found in the Business Strategy and Performance sections on pages 12 to 47 and is incorporated by reference into this Directors' Report.
Dividends for the year are as follows:
Paid interim dividend of 21p per share (last year nil) Recommended final dividend of 21p per share (last year pro rata €0.171 per share) Total ordinary dividend of 42p per share (last year pro rata €0.171 per share)
The Board has followed the UK Financial Reporting Council's '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 are 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 47 to the IFRS consolidated 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.
The membership of the Board and biographical details of the Directors are given on pages 58 to 61 and are incorporated into this report by reference to the pages. Details of Directors and their connected persons' beneficial and non-beneficial interests in the shares of the Company are shown in the Remuneration Report on pages 74 to 85.
During 2010 and in 2011 up to the date of this report, the following changes to the Board took place:
1 For the 4 month period from the date of acquisition of the Pearl businesses to 31 December 2009.
Governance
−Jonathan Moss resigned from the Board on 7 February 2011. He was replaced as Chief Executive Officer by Clive Bannister who was appointed to the Board on 28 March 2011.
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 the Remuneration Report and in note 46 to the IFRS Financial Statements.
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 following their appointment.
Following the evaluation of the Board of Directors conducted in 2010 and in accordance with the UK Corporate Governance Code, the Board of Directors will be unanimously recommending that all of the Directors should be put forward for election or re-election at the forthcoming Annual General Meeting to be held on 13 May 2011.
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, Cayman Islands common law, the provisions of the Company's Memorandum and Articles and by any valid 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 14. Subject to obtaining shareholder approval at the forthcoming Annual General Meeting, the Company is authorised to make purchases of its own shares under Article 19 and make payment for the redemption or purchase of its own shares in any manner permitted by the Cayman Companies Law (2010 version), applicable law or regulation, including without limitation, out of capital, profits, share premium or the proceeds of a fresh issue of shares.
A report on Directors' remuneration appears on pages 74 to 85 including details of their interests in shares and share options or any rights to subscribe for shares in the Company.
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' and Officers' liability insurance cover which is reviewed annually.
The disclosures required by section 7.2 of the Financial Service Authority's Disclosure and Transparency Rules can be found in the Corporate Governance Report on pages 67 to 73 which is incorporated into this Directors' Report by reference.
The Group operates a financial controls policy within the Risk Management Framework. This incorporates minimum control standards within risk appetite for the internal control and risk management systems in relation to the process for preparing consolidated accounts.
Changes to the Company's Memorandum and Articles of Association require prior shareholder approval and, in some cases, approval under the Group's two main credit facilities.
The Memorandum and Articles of Association are available on the Company's website, www.thephoenixgroup.com/investor-relations/additional-information.aspx.
Details of the authorised, issued and fully paid share capital as at 31 December 2010 and movements in share capital during the period are presented in note 16 to the IFRS financial statements.
During 2010 the Company issued 5,020,000 shares in connection with the operation of the ACSM in respect of the 2009 deferred coupon on the Tier 1 Bonds (as set out in note 19.1 of the IFRS financial statements). The shares were issued at a discount of 2.94%. As these shares were issued under the ACSM it was not necessary to use the authority granted at the 2010 AGM in relation to the disapplication of pre-emption rights.
The rights and obligations attaching to the Company's ordinary shares are set out in the Company's Articles of Association.
Pursuant to the amended contingent rights agreements dated 22 June 2010, certain shareholders undertook not to transfer the ordinary shares they received on 5 July 2010 for a period of 12 months. As at the year end, 31,251,401 ordinary shares were subject to these restrictions on transfer. Since that date there have been no changes to that number. On 22 June 2010 the same shareholders entered into orderly market arrangements with the Company which prevent a disposal of any ordinary shares (that they held on 5 July 2010) for a period of 24 months from 5 July 2010 if the disposal would negatively affect the orderly market in ordinary shares. See prospectus for further details.
Under the Articles of Association the Directors may in certain circumstances refuse to register transfers of shares. In particular the Board of Directors may refuse to register the transfer of shares to a person who is a Non-Qualified Person (as defined in the Articles of Association, which are available on the Company's website, www.thephoenixgroup.com/investor-relations/ additional-information.aspx).
Certain restrictions on the transfer of shares may be imposed from time to time by applicable laws and regulations (for example, insider trading laws), and pursuant to the Listing Rules of the Financial Services Authority and the Group's own share dealing rules whereby Directors and certain employees of the Group require the approval of the Company to deal in the Company's ordinary shares.
Business and strategy
1 This shareholding was disclosed in the Premium Listing Prospectus under Tarragona Trust. The information shown above has been notified to the
Company. 2 Hugh Osmond's share disclosure differs from that shown in the Directors' Interest table within the Remuneration Report due to differing reporting requirements as a shareholder and a director under DTR3 and DTR5 respectively. For further information details can be found from the announcements made on 8 and 28 October 2010 and available on the Company's website www.thephoenixgroup.com
Information provided to the Company pursuant to the Financial Services Authority's Disclosure and Transparency Rules is published on a Regulatory Information Service and on the Company's website. As at 28 March 2011, the Company had been notified of the following significant holdings of voting rights in its shares.
| Name | No. of ordinary shares held |
Percentage of shares in issue |
|---|---|---|
| TDR Capital Nominees Limited | 28,003,087 | 16.33% |
| Xercise2 Limited | 22,610,453 | 13.19% |
| Berggruen Holdings1 | 10,338,714 | 6.03% |
| Hugh Edward Osmond2 | 9,161,266 | 5.34% |
| Lloyds Banking Group plc | 6,970,158 | 4.07% |
| William Alan McIntosh | 6,844,529 | 3.99% |
| Alpha-Gamma Shares Limited | 6,585,499 | 3.84% |
| Royal London Asset Management Limited | 6,180,000 | 3.60% |
| Martin E Franklin | 5,885,048 | 3.43% |
| Legal & General Group plc | 5,198,399 | 3.03% |
Certain of the above shareholders also hold warrants (details of which are provided in note 24 to the IFRS Financial Statements) and contingent rights over shares (details of which are provided in note 15 to the IFRS Financial Statements).
Details of the change of control provisions contained in the amended contingent rights agreements are set out in note 15 to IFRS financial statements.
There are change of control clauses contained in certain of the Group's financing agreements. Upon a change of control of the Company, the principal amounts outstanding and the accrued interest under the Pearl and Impala facility agreements, the Pearl loan notes, the Royal London PIK facility and Royal London PIK notes would become immediately repayable or be required to be immediately redeemed.
In addition certain provisions of the Articles relating to the City Code on Takeovers and Mergers apply in connection with a takeover bid. The Articles are available on the Company's website, www.thephoenixgroup.com/investor-relations/additional-information.aspx.
All of the Company's employee share and incentive plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions and pro rata reduction as may be applicable under the rules of the employee share incentive plans.
Apart from the aforementioned, there are a number of agreements that take effect, alter or terminate upon a change of control of the Company, such as commercial contracts and joint venture agreements. None is considered to be significant in terms of their potential impact on the business of the Group as a whole.
There are a number of relationships with third parties, which are of significant value to the Group. Apart from the two main credit facilities, no single relationship, is considered to be essential to the Group as a whole.
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 is committed to achieving equality of opportunity and the equal treatment of all our people and those applying to join us. To this end, all our people share an obligation to their colleagues, customers and business partners to provide a safe, fair and equitable working environment in which every individual can seek, obtain and continue employment without experiencing any unfair or unreasonable discrimination.
The Company recognises the need to treat people with disabilities fairly and equally. Full and fair consideration is given to applications for employment by people with a disability. Applicants are asked if they have any special requirements when invited to attend an interview and reasonable provisions are made to meet the applicant's request. Applicants are considered on the basis of the job requirements and the individual's ability and competencies, also taking into consideration any appropriate reasonable workplace adjustments.
No political donations were made during the year ended 31 December 2010. The Company and its subsidiaries do not intend to make donations to political parties or independent election candidates nor have they made or do they intend to make any donations to EU political organisations or incur EU political expenditure.
During the year the Group made charitable donations of £104,094 details of which are presented in the Corporate Responsibility section on pages 50 to 55.
The AGM of the Company will be held at 32, Commercial Street, St Helier, Jersey JE2 3RU on Friday, 13 May 2011 at 1pm.
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 and a resolution that they be re-appointed will be proposed at the AGM. There is a liability cap in place in relation to audit work that is carried out by Ernst & Young Accountants LLP on the consolidated IFRS financial statements. For the MCEV supplementary information and the Group's UK subsidiaries' individual financial statements, which are audited by Ernst & Young LLP, there is no cap on auditor liability.
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.
The Company Secretary throughout the period was Gerald Watson.
Clive Bannister Jonathan Yates Group Chief Executive Officer Group Finance Director St Helier, 28 March 2011
The Board is committed to high standards of corporate governance and supports the 2008 Combined Code on Corporate Governance ('the Combined Code') which sets standards of good practice for UK listed companies. It is the Board's view that the Company has been fully compliant during the period from its London Premium Listing on 5 July 2010 to the end of the accounting period with the provisions set down in section 1 of the Combined Code. This statement is qualified to the extent that certain cyclical matters as follows did not occur during the period from London Premium Listing on 5 July 2010 to the end of 2010:
This report sets out details of how the Company has applied the principles and complied with the provisions of the Combined Code during the period from 5 July 2010 to 31 December 2010. The Company also supported the standards of the Combined Code prior to its London Premium Listing on 5 July 2010. Where appropriate, for example, in respect of Board and Committee attendance, the position for the full year is shown. From 1 January 2011 the Company is subject to the governance regime of the UK Corporate Governance Code ('the UK Code'). The Board intends to apply the provisions set down in the UK Code. In particular, in relation to the more notable provisions of the UK Code, it is intended that all directors will be subject to annual re-election by shareholders and that evaluation of the Board will be externally facilitated every three years.
The Board comprises the Non-Executive Chairman, the Chief Executive Officer, the Finance Director and eleven other Non-Executive Directors, seven of whom are independent. Biographical details of all Directors are provided on pages 58 to 61. The Board considers that the following Directors are independent as they do not have any interest or business and other relationship which could, or could 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 fixed 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 74 to 85. The terms and conditions of appointment of Non-Executive Directors are on the Company's website. In accordance with the provisions of the UK Code, all Directors will submit themselves for election or re-election at the Company's Annual General Meeting on 13 May 2011.
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. Overall, 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 supported by a set of operating principles. These matters include:
The schedule of matters reserved for the Board is available from the Group 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 Executive Management under a schedule of delegated authorities approved by the Board.
During 2010, the steps taken by the Board to improve its governance arrangements, supporting the move to a London Premium Listing, included:
The head office of the Company is in Jersey and, as such, the Board and its Committees hold their meetings in Jersey.
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 Officer, Clive Bannister, 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 58.
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 annual appraisal of the Chairman's performance by the Non-Executive Directors (which was undertaken in the latter part of 2010) and for leading the process for appointment of a new Chairman, when appropriate.
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The establishment of the current Board was completed in March 2010. In accordance with the Combined Code, the Board undertook an evaluation of its own performance and that of its Committees and individual Directors in the latter part of 2010.
The process involved completion by Directors of a questionnaire covering various aspects of Board and Director effectiveness, followed by individual meetings between the Chairman and each Director, concluding in a Board report which was discussed and approved by the Board in December 2010. The process and report covered the following areas:
The review was led by the Chairman, with the support of the Company Secretary. It is intended that the next review, expected to be undertaken in the second half of 2011, will be externally facilitated. An action list, with senior executive accountability, has been established to address the recommendations from the evaluation. The review concluded that the Board and its Committees functioned well and effectively. Most of the recommendations related to issues of process and interaction between the Board and the executive. The most significant recommendation was for the establishment of a Board Investment Committee to provide greater focus on investment strategy and performance. This will be established in the first half of 2011.
A review of each Director's individual performance took place as part of the evaluation, and the output from this will be utilised in revising the training programme for Directors.
The output from the Board and individual Director reviews informed the review of the Board composition and structure undertaken by the Nomination Committee in March 2011.
All Directors receive a tailored induction on joining the Board in accordance with a process approved by the Board. To ensure that the Directors maintain up to date 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 seven times in 2011 including a two day strategy-setting meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the Chairman without the Executive Directors being present.
Attendance by each of the Directors at Board meetings during the year was:
| Board Meetings | Nomination Committee |
Audit Committee | Remuneration Committee |
Risk Committee | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Maximum | Actual Maximum | Actual Maximum | Actual Maximum | Actual Maximum | Actual | ||||||
| Chairman | |||||||||||
| Ron Sandler | 9 | 9 | 1 | 1 | – | – | – | – | – | – | |
| Executive Directors | |||||||||||
| Clive Bannister (CEO)1 | – | – | – | – | – | – | – | – | – | – | |
| Jonathan Moss2 | 9 | 9 | – | – | – | – | – | – | – | – | |
| Simon Smith3 | 5 | 5 | – | – | – | – | – | – | – | – | |
| Jonathan Yates (FD)4 | 4 | 4 | – | – | – | – | – | – | – | – | |
| Non-Executive Directors | |||||||||||
| Alastair Lyons5 | 7 | 7 | – | – | 6 | 6 | – | – | – | – | |
| Ian Ashken | 9 | 9 | – | – | – | – | – | – | – | – | |
| René-Pierre Azria | 9 | 6 | – | – | – | – | – | – | 5 | 3 | |
| David Barnes | 9 | 8 | – | – | 6 | 6 | 4 | 4 | – | – | |
| Charles Clarke6 | 8 | 8 | – | – | 6 | 5 | – | – | – | – | |
| Ian Cormack | 9 | 7 | 1 | 1 | – | – | 4 | 4 | – | – | |
| Tom Cross Brown | 9 | 9 | 1 | 1 | – | – | – | – | 5 | 5 | |
| Manjit Dale | 9 | 8 | – | – | – | – | – | – | – | – | |
| Isabel Hudson7 | 8 | 8 | – | – | – | – | 4 | 3 | 5 | 4 | |
| Hugh Osmond | 9 | 7 | – | – | – | – | – | – | 5 | 3 | |
| David Woods8 | 8 | 7 | – | – | – | – | – | – | 5 | 5 |
The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the Committees can be found on the Company's website.
Alastair Lyons, Chairman David Barnes Charles Clarke
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. Following its establishment on 29 March 2010, the Audit Committee met six times during 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 and 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.
Governance
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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 can be found on the Company's website.
Ron Sandler, Chairman Ian Cormack Tom Cross Brow n
The Nomination Committee is responsible for considering the size, composition and balance of the Board, the retirement and appointment of Directors and making recommendations to the Board on these matters. During 2010 the appointment of new Directors was considered by the whole Board, as the Nomination Committee was not established until 18 February 2010 following the appointment of additional independent Non-Executive Directors to the Board. In all cases, an external search consultancy was used to identify suitable candidates. The Nomination Committee will consider succession planning for Directors and other Senior Executives prior to its consideration by the Board.
During 2010 the Nomination Committee met to review its duties and how they should best be addressed. It also reviewed the process being undertaken for the Board Effectiveness Review which was concluded in December 2010 (see above). The Committee agreed that the outcome of the Board Effectiveness Review would inform the Committee's review of the Board structure, size and composition which would take place in 2011 prior to the Board putting forward Directors for re-election at the 2011 Annual General Meeting on 13 May 2011.
Ian Cormack, Chairman David Barnes Isabel Hudson
The composition of the Committee accords with the requirements of the Combined Code that the Remuneration Committee should consist of at least three independent Non-Executive Directors. The Remuneration Committee met four times during 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 and the Committee's activities in 2010 are provided in the Remuneration Report on pages 74 to 85.
Hewitt New Bridge Street, the Company's remuneration consultants, provided advice to the Remuneration Committee and are independent of the Company.
David Woods, Chairman René-Pierre Azria Tom Cross Brown Isabel Hudson Hugh Osmond
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'.
The Risk Committee met five times in 2010 following its establishment on 26 February 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 and does not extend into operational matters which are for the Executive within the overall risk framework determined by the Board. Details of the Risk Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 45 to 47.
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 Company's Annual General Meeting provides an opportunity to communicate with its shareholders. At the 2011 meeting, the Company intends to comply with the UK Code as it relates to voting, the separating of resolutions and the attendance of Board Committee Chairmen. Shareholders will be 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 UK Code, details of proxy voting by shareholders will be made available at the meeting and will be 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 2010 (refer to page 88.)
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Strategy and Performance sections on pages 12 to 47.
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 62.
The Combined Code requires Directors to review the effectiveness of the Company's systems of internal controls which includes financial, operational and compliance controls and risk management systems. 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's review of the period covered by this report, which was undertaken with the assistance of the Audit and Risk Committees, was completed on 28 March 2011. Actions are being taken to remedy any significant failings and weaknesses identified by the review.
The Board (and its subsidiary company Boards) monitor internal controls on a continual basis, in particular through Audit and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period covered by this report and up to the date of approval of the Annual Report and Accounts for 2010 in accordance with the 'Internal Control: Revised Guidance for Directors on the Combined Code' published by the Financial Reporting Council.
Additional assurance is provided by the internal audit function, which operates and reports independently of management. The internal audit function provides objective assurance on risk mitigation and control to the Audit Committee.
for the year ended 31 December 2010
I am pleased to introduce the Remuneration Report for 2010. During the year and following the Premium Listing of the Company's shares on the London Stock Exchange in July 2010, the Remuneration Committee has carried out a review of senior executive remuneration arrangements. The main conclusions of the review, which are set out in more detail in the report which follows, are:
The Committee has also honoured the share commitment made to the Company Chairman in relation to his 2009 recruitment, dealt with the replacement of the Group Finance Director and, following the year end, the Chief Executive Officer. Details of the Chairman's share award and the termination arrangements and recruitment packages for the Chief Executive Officer and Group Finance Director roles are set out overleaf.
Governance
The Committee met in early 2011 to consider the impact of the revisions to the FSA's Remuneration Code published in late December 2010 and which took effect on 1 January 2011. The Committee has concluded that, although insurance businesses are not affected, the Group's asset management business (IGNIS) is categorised as a 'Tier 4' firm. The Committee has identified all group companies affected by the Code and identified those staff who are within its ambit ('Code Staff'). The Committee will be extending its terms of reference to include these individuals. The Committee is satisfied that no significant changes to remuneration practices will be necessary and is considering how best to meet the new disclosure obligations which must be published before the end of 2011.
The Committee has worked hard over the past year on the Group's remuneration policy and structures (many of which reflected the Group's previous ownership structure) with the objective of aligning them with UK best practice and the current business strategy. I encourage shareholders to support the new arrangements.
Ian Cormack Remuneration Committee Chairman
Although not required by a non-UK incorporated company, this report has been prepared in accordance with the requirements of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how, following the switch to Premium Listing in July 2010, the Board has complied with the provisions set out in the Combined Code relating to remuneration matters. This report sets out the policy for the financial year just ended, for the forthcoming year and, subject to ongoing review, for subsequent years.
The auditors have reported on certain parts of the Directors' Remuneration Report and stated whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 2006. The report has, therefore, been divided into separate sections for audited and unaudited information.
The Group established a Remuneration Committee (the 'Committee') on 18 February 2010.
The Committee's main responsibilities are to:
The table below shows the independent Non-Executive Directors who served on the Committee during 2010:
| Member | From | To |
|---|---|---|
| Ian Cormack (Committee Chairman) | 18 February 2010 | To date |
| David Barnes | 18 February 2010 | To date |
| Isabel Hudson | 18 February 2010 | To date |
The Committee meets at least twice a year but more frequently if required. During the year, four Remuneration Committee meetings were held and details on attendance at meetings are set out in the Corporate Governance Report.
None of the Committee members has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Committee makes recommendations to the Board. No director plays a part in any discussion about their own remuneration. The terms of reference of the Committee are available at: www.thephoenixgroup.com.
The Committee received independent remuneration advice from its appointed adviser, Hewitt New Bridge Street ('HNBS'), part of Aon Hewitt. A separate team within Aon Hewitt also provided advice to the Group in respect of actuarial pension services although the Committee does not believe that the independence of its adviser is compromised by this appointment. The Committee also consulted with the Chief Executive Officer, Group HR Director and General Counsel who attended, by invitation, various Committee meetings during the year although no Executive is ever permitted to participate in discussions or decisions regarding their own remuneration. Going forward, input will also be sought from the Chief Risk Officer.
Executive remuneration packages are structured so that they:
There are five main elements of the remuneration package for Executive Directors and senior executives:
The policy for Directors for 2011 is described in more detail below.
Executive Directors' base salaries are reviewed annually by the Committee taking into account the responsibilities, skills and experience of each individual and salary levels within listed companies of a similar size and complexity. Base salary levels are as follows:
| Name | Role | From 1 January 2011 | From 1 January 2010 |
|---|---|---|---|
| Jonathan Moss | Chief Executive Officer1 | £650,000 | £650,000 |
| Jonathan Yates | Group Finance Director | £415,000 | £400,0002 |
With effect from 1 January 2011, Jonathan Yates' base salary was increased by 3.75 percent to £415,000 to reflect his performance and increasing experience in the role from appointment.
Benefits received by Executive Directors comprise a car allowance, private medical insurance, relocation and life assurance.
The Executive Directors (as at the date of this report) receive a contribution equal to 20 percent of base salary to a defined contribution pension arrangement. Jonathan Moss received a contribution equal to 11.7 percent of base salary (up to a maximum earnings limit of £123,600) and Simon Smith participated in the Group's defined benefit arrangement until he ceased to be employed by the Group.
For 2010, annual incentive potential was capped at 150 percent of base salary for Executive Directors. Performance targets were based on the achievement of personal objectives and the application of a corporate multiplier of between 0, 1 (target) and 2 (maximum), which is derived from performance against targets based on the following:
60 percent – targeted improvements in market consistent embedded value;
20 percent – actual cost management performance versus budget; and
20 percent – the achievement of predetermined risk management targets.
Details of the actual incentive payments awarded for 2010 are presented in the emoluments table and notes on page 82.
Incentive awards for 2010 which are in excess of target will be deferred into shares for three years. The shares comprising the deferred element will vest three years from the date of award and will normally be forfeited if the individual leaves the Group prior to vesting.
For 2011, the maximum incentive potential remains 150 percent of base salary for Executive Directors although the arrangement has been simplified and aligned closer to market practice. The multiplicative approach operated in prior years has been replaced with a more market consistent additive structure. For Executive Directors and Senior Executives, 20 percent of potential will be based on personal measures and 80 percent of potential will be based on the following financial measures:
| Performance Metric | % of 80% of incentive potential based on financial measures |
|---|---|
| Embedded Value operating profit | 30% |
| Market Consistent Embedded Value | 30% |
| Cash flow | 30% |
| Cost management | 10% |
In addition to the above targets, the Committee must be satisfied that management has identified and managed material business risks in an appropriate manner for any incentive payment to be paid.
Following a review of deferral levels, the level of annual incentive deferral has been increased to market consistent levels. For any incentive paid for 2011, one-third of any annual incentive paid (compared with any award above target operated in 2010) will now be deferred into shares for 3 years. The shares comprising the deferred element will vest three years from the date of award and will normally be forfeited if the individual leaves the Group prior to vesting.
Consistent with best practice, the Committee will operate a clawback provision which will operate for any annual incentive amounts subsequently found to have been based on materially inaccurate results.
responsibilit
Performance
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The Long-Term Incentive Plan ('LTIP') is designed to reward management for delivering the Group's strategic objectives and improve the alignment between the interests of management and shareholders. Each year, participants receive awards of shares in the Group which will normally vest three years after they were awarded, subject to the satisfaction of performance conditions measured over a three-year period and continued service. The LTIP's annual individual limit is 300 percent of base salary (400 percent in exceptional circumstances) although the current policy is to award Executive Directors no more than 200 percent of base salary (with lower levels awarded below Board).
For LTIP awards granted in May 2010, the performance measures are 50 percent based on market consistent embedded value ('EV') growth and 50 percent based on cumulative cash generation, with both targets measured over the 3 financial years commencing 1 January 2010 and underpinned by a debt management assessment. A summary of the targets is set out below:
| EV Growth (50 percent of awards) |
25 percent of the EV related component of the award will vest for EV growth in excess of the risk free rate by 2.5 percent per annum. rising on a pro rata basis until 100 percent vests for EV growth in excess of the risk free rate by 6 percent per annum. |
|---|---|
| Cash Generation (50 percent of awards) |
25 percent of the cash generation component of the award will vest for cumulative cash generation of £1.375 billion rising on a pro rata basis until 100 percent vests for cash generation of £1.655 billion. |
| Debt Underpin | Notwithstanding the EV and cash generation performance targets, if the Committee determines that the Group's debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance period and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt management and capital structuring, the level of awards vesting will either be reduced or lapse in full. |
The Committee selected these performance metrics as they are directly linked to the objectives set out in the Group's strategy and there is a clear line of sight for participants between performance and reward.
The current expectation is that EV and cash generation performance metrics will continue to be used for the 2011 awards, with performance targets (which will be no less challenging than those presented above) set in advance of the awards being granted.
The Company operates share ownership guidelines for Executive Directors. Under the guidelines, Executive Directors are expected to retain all shares (net of tax) which vest under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time that they hold a specified value of shares (200 percent of salary for the Chief Executive Officer, 100 percent of salary for other Executive Directors). Once shareholding guidelines have been met, individuals are expected to retain these levels as a minimum. The Committee will review shareholdings annually in the context of this policy.
The Group operates a Sharesave scheme which is approved by HM Revenue & Customs. All eligible employees, including Executive Directors, are invited to participate on similar terms to save up to a maximum of £250 each month for a fixed period of three or five years. At the end of the savings period, individuals may use their savings plus a tax-free bonus to buy ordinary shares in the Company at a discount currently capped at 15 percent of the market price set at the launch of each scheme.
The Committee is responsible for approving the remuneration practices within IGNIS, the Group's asset management business. In structuring remuneration arrangements within IGNIS, the Committee applies similar overall principles to those applied to the rest of the Group, but relating these to an appropriate peer group of asset managers.
Executive Director service contracts, which do not contain expiry dates, provide that compensation provisions for termination without notice will only extend to 12 months of salary, fixed benefits and pension (which may be payable in instalments and subject to mitigation). By excluding any entitlement to compensation for loss of the opportunity to earn variable pay, the Committee believes the contracts to be consistent with best practice. The Committee also has discretion to mitigate further by paying on a phased basis with unpaid instalments ceasing if the executive finds alternative employment. Contracts do not contain change of control provisions.
| Name | Date of Contract | Notice period from either party (months) |
|---|---|---|
| Jonathan Moss | 5 February 2010 | 12 |
| Jonathan Yates | 6 May 2010 | 12 |
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external Boards or committees as long as these are not deemed to interfere with the business of the Group. In 2010, following his appointment to the Board of Phoenix Group Holdings, Jonathan Yates earned £20,000 from an external directorship.
Clive Bannister was appointed Group Chief Executive Officer from 8 February 2011. A summary of the main elements of his package, which is consistent with the existing Executive Director remuneration policy, is as follows:
| Base salary | £700,000 p.a. |
|---|---|
| Annual Incentive Plan | 150% of base salary (reduced pro-rata for 2011 service), with one-third of any payment deferred into shares for three years |
| LTIP | 200% of base salary (with the first award to be granted in April 2011) |
| Pension | 20% of base salary |
| Share ownership guidelines |
200% of base salary to be achieved through the retention of all post-tax shares which vest under the LTIP (or any other discretionary arrangement introduced in the future) |
| Notice period | 12 months from either party |
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Jonathan Moss left the role of Chief Executive Officer on 7 February 2011 and will leave the Group on 29 March 2011. He will receive a payment in lieu of notice of £690,000 in aggregate, reflecting both his base salary and benefits in line with his contractual entitlements. In addition, a contribution of £857,188 will be made to the Company's employee benefit trust subject to a recommendation that it will be allocated to a sub-trust for the benefit of Jonathan Moss' family in lieu of any annual incentive for 2010. Jonathan Moss will also receive £50,000 by way of compensation for loss of statutory employment rights and up to £30,000 in respect of his legal expenses and outplacement services. His long-term incentive awards will continue to vest until the normal vesting date (with performance conditions and time pro-rating applying for the 2010 LTIP awards) with the exception of his Bonus Share Plan awards, where the rules state that awards vest on cessation. Disclosure of the termination arrangements will also be provided in next year's Remuneration Report.
The Non-Executive Directors, including the Group Chairman, have letters of appointment which set out their duties and responsibilities. Appointment is for a fixed term of three years, terminable by one month's notice on either side. Non-Executive Directors are not eligible to participate in incentive arrangements or receive pension provision or other benefits such as private medical insurance ('PMI') and life insurance.
| Name | Date of Letter of Appointment | Appointment end date | Unexpired term (Months) |
|---|---|---|---|
| Ian Ashken | 2 September 2009 | 2 September 2012 | 16 |
| René-Pierre Azria | 2 September 2009 | 2 September 2012 | 16 |
| David Barnes | 2 September 2009 | 2 September 2012 | 16 |
| Charles Clarke | 18 February 2010 | 18 February 2013 | 22 |
| Ian Cormack | 2 September 2009 | 2 September 2012 | 16 |
| Tom Cross Brown | 24 September 2009 | 24 September 2012 | 17 |
| Manjit Dale | 2 September 2009 | 2 September 2012 | 16 |
| Isabel Hudson | 18 February 2010 | 18 February 2013 | 22 |
| Alastair Lyons | 29 March 2010 | 29 March 2013 | 23 |
| Hugh Osmond | 2 September 2009 | 2 September 2012 | 16 |
| Ron Sandler | 24 September 2009 | 24 September 2012 | 17 |
| David Woods | 18 February 2010 | 18 February 2013 | 22 |
The remuneration of the Non-Executive Directors is a matter for the Chairman and Executive members of the Board and the remuneration of the Non-Executive Chairman is a matter for the Committee. Fees for both Non-Executive Directors and the Non-Executive Chairman are reviewed from time to time with regard to the complexity of the Group, the time commitment required and the level of fees paid by comparable companies.
For 2010, fee levels were set at £450,000 for the Chairman of the Board, £100,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable where an individual also Chairs the Audit, Remuneration or Risk Committee; and/or (ii) £10,000 payable where a Non-Executive Director also sits on the Board of a subsidiary company. Following a review of fees for 2011, an additional fee of £5,000 will be paid for the role of Senior Independent Director and the additional fee for those Non-Executive Directors serving on subsidiary Boards will be increased to £20,000 to reflect their time commitment (although their base fee will be reduced from £100,000 to £90,000). Other fee levels remain unchanged.
The emoluments of the Directors for 2010 were as follows:
| Name | Directors salaries/fees £ |
Benefits8 £ |
Annual Incentive9 £ |
Compensation for loss4 of office£ |
Contribution to EBT £ |
Total 20101 £ |
Total 2009 £ |
|---|---|---|---|---|---|---|---|
| Non-Executive Chairman | |||||||
| Ron Sandler | 450,000 | – | – | – | – | 450,000 | 121,154 |
| Executive Directors | |||||||
| Jonathan Moss2 | 650,000 | 12,393 | – | – | 857,188 | 662,393 | 771,658 |
| Jonathan Yates3 | 209,091 | 52,764 | 284,375 | – | – | 546,230 | – |
| Simon Smith4 | 192,222 | 6,098 | – | 538,638 | 611,875 | 736,958 | 741,8075 |
| Non-Executive Directors | |||||||
| Ian Ashken | 100,000 | – | – | – | – | 100,000 | 33,333 |
| René-Pierre Azria | 100,000 | – | – | – | – | 100,000 | 33,333 |
| David Barnes | 113,295 | – | – | – | – | 113,295 | 36,667 |
| Charles Clarke6 | 86,026 | – | – | – | – | 86,026 | – |
| Ian Cormack | 120,000 | – | – | – | – | 120,000 | 62,710 |
| Tom Cross Brown | 115,000 | – | – | – | – | 115,000 | 62,599 |
| Manjit Dale | 100,000 | – | – | – | – | 100,000 | 5,385 |
| Isabel Hudson6 | 86,026 | – | – | – | – | 86,026 | – |
| Alastair Lyons7 | 82,500 | – | – | – | – | 82,500 | – |
| Hugh Osmond | 100,000 | – | – | – | – | 100,000 | 5,385 |
| David Woods6 | 94,628 | – | – | – | – | 94,628 | – |
| Former Directors | |||||||
| Jonathan Evans | – | – | – | – | – | – | 24,380 |
| Ashley Silverton | – | – | – | – | – | – | 571,775 |
| Total | 2,598,788 | 71,255 | 284,375 | 538,638 1,469,063 3,493,056 2,470,186 |
1 The total figures for Jonathan Moss and Simon Smith do not include the amount of any contribution made to the Group's employee benefit trust (see notes 2 and 4 below).
2 In lieu of any incentive payment for 2010 £857,188 was contributed to the Group's employee benefit trust (the sum being calculated by reference to the 2010 corporate and personal performance targets) post year end. The contribution is subject to a recommendation that it be appointed to a sub-trust for the benefit of Jonathan Moss' family.
3 Jonathan Yates joined the Phoenix Group on 4 May 2010 and was appointed to the Board as a Director on 23 June 2010. The detail shown only relates to the period from his appointment as a Director to 31 December 2010. In addition to the amounts shown, as part of his recruitment arrangements Jonathan Yates was paid an amount of £20,000.
4 Simon Smith left the Board with effect from 23 June 2010 and his employment terminated on 3 October 2010. His termination provisions were set out in full in the Premium Listing prospectus and are summarised again here. Simon Smith received £538,638 in connection with the termination of his employment representing 12 months salary and benefits. In lieu of any incentive payment for 2010, £611,875 was contributed to the Group's employee benefit trust (the sum being calculated by reference to the 2010 corporate and personal performance targets post year end and reduced pro-rata to reflect the part of the financial year not worked plus £100,000). The contribution is subject to a recommendation that it be appointed to a sub-trust for the benefit of Simon Smith's family. In addition, the Committee agreed to allow his 2010 LTIP to vest at the normal vesting date in 2013, subject to the satisfaction of the performance conditions and a two-thirds reduction to reflect the shortened service period. All emolument figures shown relate solely to the period he was a Director of the Group.
5 Following a review of the Annual Bonus paid to Simon Smith in 2010 an additional amount of £99,174 was paid following the 2009 Report & Accounts being published. As a result the total emoluments for 2009 shown in the table above have been accordingly adjusted.
6 Appointed to the Board on 18 February 2010.
7 Appointed to the Board on 29 March 2010.
Jonathan Moss received a Company contribution of 11.7 percent of salary (up to a maximum earnings limit of £123,600) to a defined contribution pension arrangement. Jonathan Yates received a Company contribution of 20 percent of base salary. Simon Smith was a member of the Pearl Final Salary Section (defined benefit) of the Pearl Group Staff Pension Scheme.
5 In addition to the shares awarded under the LTIP presented above, participants received an additional number of shares (based on the number of LTIP awards which actually vest) to reflect the dividends paid during the vesting period. An additional number of shares were appointed on vesting for the benefit of the Simon Smith's sub-trust to reflect the dividends paid prior to vesting of the BSP shares in accordance with the terms of his Compromise Agreement. 6 On vesting, the shares awarded under the LTIP were appointed into sub-trusts of the Phoenix Group Holdings employee benefit trust, for the benefit of Jonathan Moss' family. It is expected that on vesting the shares to be awarded under the BSP on termination date will also be appointed into this sub-trust. 7 On vesting, the shares awarded under the LTIP and BSP were appointed into sub-trusts of the Phoenix Group Holdings employee benefit trust for the benefit of Simon Smith's family.
His pension entitlement accrued at 1/60th for each year of service. No contributions were paid or were payable by Simon Smith under the Scheme. Details of Executive Director's pension arrangements during the year are set out below.
During the year to 31 December 2010, the Group has made the following contributions to the defined contribution scheme:
| £ | |
|---|---|
| Jonathan Moss | 14,461 |
| Jonathan Yates | 59,048 |
| Accrued pension at | Accrued pension at | Change in | Transfer value at | Transfer value at | Change in transfer | |
|---|---|---|---|---|---|---|
| 31 December 2010* | 31 December 2009 | accrued pension | 31 December 2010** | 31 December 2009 | value | |
| £ | £ | £ | £ | £ | £ | |
| Simon Smith | 24,720 | 23,175 | 1,545 | 322,784 | 319,704 | 3,080 |
*Accrued pension at 31 December 2010 is the member's deferred pension at date of leaving on 3 October 2010.
**The transfer value basis is agreed by the Trustees of the Scheme having taken advice from the Scheme Actuary. The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme's liability in respect of the director's pension benefits. They do not represent sums payable to the director and therefore cannot be added meaningfully to annual remuneration. The increase in the transfer value is the increase in the transfer value of the accrued benefits during the year, taking into account any changes in valuation assumptions. No other Executive Director participates in this scheme.
As at 31 December 2010, Directors' interests under long-term share-based arrangements were as follows:
| Date of grant | Share price on grant |
As at 1 Jan 2010 |
Shares granted |
Shares vested | Shares lapsed |
As at 31 Dec 2010 |
Vesting date | |
|---|---|---|---|---|---|---|---|---|
| Jonathan Moss | ||||||||
| LTIP1 | 21 Sep 2009 | 842p | 112,500 | – | 115,0005,6 | – | – | 5 Jul 2010 |
| BSP2 | 21 Sep 2009 | 842p | 112,500 | – | – | – | 112,5006 | 29 Mar 2011 |
| Phantom3 02 Sep 2009 | 818p | 73,350 | – | – | – | 73,350 | 02 Sep 2012 | |
| LTIP4 | 28 May 2010 | 627.5p | – | 207,171 | – | – | 207,171 | 28 May 2013 |
| 298,350 | 207,171 | 115,000 | – | 393,021 | ||||
| Jonathan Yates | ||||||||
| LTIP4 | 28 May 2010 | 627.5p | – | 127,490 | – | – | 127,490 | 28 May 2013 |
| – | 127,490 | – | – | 127,490 | ||||
| Simon Smith | ||||||||
| LTIP1 | 21 Sep 2009 | 842p | 100,000 | – 102,2225,7 | – | – | 5 Jul 2010 | |
| BSP2 | 21 Sep 2009 | 842p | 100,000 | – 102,9015,7 | – | – | 03 Oct 2011 | |
| Phantom3 02 Sep 2009 | 818p | 58,086 | – | – | – | 58,086 | 02 Sep 2012 | |
| LTIP4 | 28 May 2010 | 627.5p | – | 159,362 | – | 159,362 | 28 May 2013 | |
| 258,086 | 159,362 | 205,123 | – | 217,430 |
1 The performance condition attached to the 21 September 2009 LTIP award was a successful Premium Listing on the London Stock Exchange. Following shareholder approval of the Premium Listing at the 2010 Annual General Meeting, these awards vested early on the date of Admission. The share price at vesting was 671p.
2 The Bonus Share Plan ('BSP') was introduced to reward a small number of senior executives upon completion of the September 2009 refinancing. BSP awards normally vest on the second anniversary of grant, subject to continued service. In line with the BSP rules, Simon Smith's BSP awards vested in full on the termination of his employment (3 October 2010) when the share price was 686p and Jonathan Moss' BSP awards will vest in full on the termination of his employment on 29 March 2011. No further BSP awards will be granted.
3 In March 2010, the Group confirmed the operation of a phantom share award to a small number of senior executives. Individuals were granted a notional number of shares based on a multiple of salary at the time of grant (150% of base salary for the Chief Executive Officer and 125% of base salary for the Group Finance Director at that time (Simon Smith)). Awards (including those granted to Simon Smith and Jonathan Moss who will be treated as good leavers) will vest on the third anniversary of grant generally subject to continued employment, with the value delivered in cash based on the prevailing share price at that time.
4 The performance conditions for the 28 May 2010 award are set out in the Remuneration Policy section of this report. Simon Smith's 2010 LTIP will vest at the normal vesting date in 2013, subject to the satisfaction of the performance conditions and a two thirds reduction to reflect this shortened service period (i.e. the 159,362 shares under award presented in the table above will be reduced (i) by two-thirds to 53,120 shares; and (ii) further reduced to the extent that performance targets are not met in full). Jonathan Moss' award will be similarly pro-rated with the 207,171 shares presented in the table reduced to 57,547 shares.
At the end of the year, the Executive Directors' Sharesave share options were as follows:
| As at 1 Jan 2010 |
Options granted |
Options vested |
Options exercised |
Options lapsed |
As at 31 Dec 2010 |
Exercise price | Exercisable from | Date of expiry | |
|---|---|---|---|---|---|---|---|---|---|
| Jonathan Moss | – | 1,611 | – | – | – | 1,611 | £5.63 | 01 Mar 2013 |
31 Aug 2013 |
| Jonathan Yates | – | – | – | – | – | – | – | – | – |
| Simon Smith | – | 2,761 | – | – | (2,761) | – | £5.63 | – | – |
Sharesave options were granted on 22 January 2010 to Jonathan Moss and Simon Smith. Simon Smith's Sharesave options lapsed on cessation of employment on 3 October 2010. Jonathan Moss' Sharesave options are due to lapse on 29 March 2011.
During the year ended 31 December 2010, the highest mid-market price of the Group's shares was 758p and the lowest mid-market price was 557.5p. At 31 December 2010, the Company's share price was 611p.
| Name | As at 1 January 2010 or date of appointment if later |
As at 31 December 2010 and as at 28 March 20102 |
|---|---|---|
| Jonathan Moss | 33,989 | 162,505 |
| Jonathan Yates | – | – |
| Ian Ashken | – | 1,260,7595 |
| René-Pierre Azria | 16,391 | 16,866 |
| David Barnes | – | 2,300 |
| Charles Clarke | – | 2,000 |
| Ian Cormack | – | – |
| Tom Cross Brown | – | 1,6152 |
| Manjit Dale3 | – | – |
| Isabel Hudson | – | 1,587 |
| Alastair Lyons | – | 7,500 |
| Hugh Osmond | 717,166 | 9,714,0154 |
| Ron Sandler1 | – | 182,133 |
| David Woods | – | – |
Aside from the shares purchased by Tom Cross Brown, there have been no other changes in the interests set out above between 31 December 2010 and 28 March 2011.
Business and strategy
The graph below shows the value by 31 December 2010, on a total shareholder return basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of the Group's Premium Listing on the London Stock Exchange) compared with the value of £100 invested in the FTSE 250 index (excluding investment trusts).
The FTSE 250 index (excluding investment trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index of which the Group is a constituent.
This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by
Ian Cormack Remuneration Committee Chairman 28 March 2011
information
| 88 | Statement of Directors' responsibilities |
|---|---|
| 89 | Independent Auditor's report |
| 90 | Consolidated income statement |
| 91 | Statement of consolidated comprehensive income |
| 91 | Pro forma reconciliation of Group operating profit to profit attributable to owners |
| 92 | Statement of consolidated financial position |
| 94 | Statement of consolidated cash flows |
| 95 | Statement of consolidated changes in equity |
| 97 | Notes to the consolidated financial statements |
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:
Clive Bannister Jonathan Yates
St Helier 28 March 2011
Group Chief Executive Group Finance Director
To: The Meeting of Shareholders of Phoenix Group Holdings
We have audited the accompanying consolidated financial statements of Phoenix Group Holdings, Cayman Islands, and its subsidiaries (the 'Group'), which comprise the statement of consolidated financial position as at 31 December 2010, the consolidated income statement, the pro forma reconciliation of Group operating profit to profit attributable to owners, the statement of consolidated comprehensive income, the statement of consolidated changes in equity and the statement of consolidated cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information.
The Directors are responsible for the preparation and fair presentation of these 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. Furthermore the Board of Directors is responsible for such internal control as it determines is necessary to enable the preparation 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 these consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law, including both the Dutch and International Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 Group'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 the Group as at 31 December 2010, 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 Section 2:393 sub 5 at e and f of the Netherlands Civil Code, we have no deficiencies to report as a result of our examination as to whether the Directors' Report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Directors' Report, to the extent we can assess, is consistent with the consolidated financial statements as required by Section 2:391 sub 4 of the Netherlands Civil Code.
We have nothing to report in respect of the following items that we are required to review under the Listing Rules:
We have nothing to report in respect of the following items that we are required to report to you under the UK Companies Act 2006 if, in our opinion:
The Hague, 28 March 2011
was signed by S. B. Spiessens IFRS financial statements
Additional information
for the year ended 31 December 2010
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Gross premiums written | 1,534 | 545 | |
| Less: premiums ceded to reinsurers | (85) | (31) | |
| Net premiums written | 1,449 | 514 | |
| Fees | 6 | 162 | 101 |
| Net investment income | 7 | 5,907 | 1,032 |
| Total revenue, net of reinsurance payable | 7,518 | 1,647 | |
| Other operating income | 8 | 25 | 67 |
| Net income | 7,543 | 1,714 | |
| Policyholder claims | (5,260) | (2,043) | |
| Less: reinsurance recoveries | 210 | 105 | |
| Change in insurance contract liabilities | (252) | 1,137 | |
| Change in reinsurers' share of insurance contract liabilities | 89 | 142 | |
| Transfer to unallocated surplus | 21 | (143) | (175) |
| Net policyholder claims and benefits incurred | (5,356) | (834) | |
| Change in investment contract liabilities | (964) | (429) | |
| Acquisition costs | 9 | (12) | (8) |
| Change in present value of future profits | 33 | 7 | 4 |
| Amortisation of acquired in-force business | 33 | (147) | (50) |
| Amortisation of customer relationships | 33 | (18) | (7) |
| Administrative expenses | 10 | (676) | (255) |
| Net (expense)/income attributable to unitholders | (97) | 43 | |
| Total operating expenses | (7,263) | (1,536) | |
| Profit before finance costs and tax | 280 | 178 | |
| Finance costs | 12 | (269) | (87) |
| Profit for the year before tax | 11 | 91 | |
| Tax attributable to policyholders' returns | 13 | (5) | 60 |
| Profit before the tax attributable to owners | 6 | 151 | |
| Tax credit | 13 | 69 | 44 |
| Add/(deduct): tax attributable to policyholders' returns | 13 | 5 | (60) |
| Tax credit/(charge) attributable to owners | 13 | 74 | (16) |
| Profit for the year attributable to owners | 80 | 135 | |
| Attributable to: | |||
| Owners of the parent | 30 | 95 | |
| Non-controlling interests | 19 | 50 | 40 |
| 80 | 135 | ||
| Earnings per ordinary share | |||
| Basic earnings per ordinary share | 15 | 20.1p | 102.9p |
| Diluted earnings per ordinary share | 15 | 20.1p | 89.8p |
The 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 2010
| 2010 | 2009 | ||
|---|---|---|---|
| Notes | £m | £m | |
| Profit for the year | 80 | 135 | |
| Other comprehensive income: | |||
| Actuarial gains of defined benefit pension schemes | 32 | 45 | 105 |
| Contribution in respect of actuarial losses of defined | |||
| benefit pension scheme by the with-profit funds | 32 | 27 | – |
| Exchange differences on translating foreign operations | – | (40) | |
| 72 | 65 | ||
| Tax credit/(charge) | 13 | 4 | (31) |
| 76 | 34 | ||
| Total comprehensive income for the year | 156 | 169 | |
| Attributable to: | |||
| Owners of the parent | 106 | 129 | |
| Non-controlling interests | 50 | 40 | |
| 156 | 169 |
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 2010
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Operating profit | |||
| Phoenix Life | 388 | 285 | |
| IGNIS Asset Management | 46 | 14 | |
| 434 | 299 | ||
| Group costs | (61) | (17) | |
| Total operating profit before adjusting items | 4.2 | 373 | 282 |
| Investment return variances and economic assumption changes on long-term business | 5 | 18 | 145 |
| Variance on owners' funds | 5 | 19 | (70) |
| Amortisation of acquired in-force business | (132) | (45) | |
| Amortisation of customer relationships | (18) | (7) | |
| Non-recurring items | 4.2 | (139) | (105) |
| Profit before finance costs attributable to owners | 121 | 200 | |
| Finance costs attributable to owners | (115) | (49) | |
| Profit before the tax attributable to owners | 4.2 | 6 | 151 |
| Tax credit/(charge) attributable to owners | 13 | 74 | (16) |
| Profit for the year attributable to owners | 80 | 135 |
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 2010
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| EQUITY AN D LIABILITIES |
|||
| Equity attributable to owners of the parent | |||
| Share capital | 16 | − | − |
| Share premium | 1,109 | 859 | |
| Other reserves | 5 | 257 | |
| Shares held by employee trust and group entities | 17 | (13) | (4) |
| Foreign currency translation reserve | 93 | 93 | |
| Retained earnings | 386 | 207 | |
| Total equity attributable to owners of the parent | 1,580 | 1,412 | |
| Non-controlling interests | 19 | 720 | 728 |
| Total equity | 2,300 | 2,140 | |
| Liabilities | |||
| Pension scheme deficit | 32 | 77 | 125 |
| Insurance contract liabilities | |||
| Liabilities under insurance contracts | 20 | 50,479 | 50,291 |
| Unallocated surplus | 21 | 864 | 721 |
| 51,343 | 51,012 | ||
| Financial liabilities | |||
| Investment contracts | 8,849 | 8,570 | |
| Borrowings | 22 | 4,028 | 4,181 |
| Deposits received from reinsurers | 23 | 419 | 431 |
| Derivatives | 24 | 2,431 | 2,842 |
| Net asset value attributable to unit holders | 1,937 | 946 | |
| Obligations for repayment of collateral received | 25 | 10,160 | 4,106 |
| 26 | 27,824 | 21,076 | |
| Provisions | 27 | 73 | 101 |
| Deferred tax | 28 | 569 | 776 |
| Reinsurance payables | 25 | 17 | |
| Payables related to direct insurance contracts | 29 | 713 | 759 |
| Current tax | 28 | 99 | 103 |
| Accruals and deferred income | 30 | 214 | 177 |
| Other payables | 31 | 327 | 650 |
| Total liabilities | 81,264 | 74,796 | |
| Total equity and liabilities | 83,564 | 76,936 |
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| ASSET S |
|||
| Pension scheme surplus | 32 | 59 | − |
| Intangible assets | |||
| Goodwill | 77 | 77 | |
| Acquired in-force business | 2,016 | 2,163 | |
| Customer relationships | 420 | 438 | |
| Present value of future profits | 42 | 35 | |
| 33 | 2,555 | 2,713 | |
| Property, plant and equipment | 34 | 34 | 34 |
| Investment property | 35 | 1,732 | 1,915 |
| Financial assets | |||
| Loans and receivables | 2,293 | 1,081 | |
| Derivatives | 24 | 3,197 | 3,540 |
| Equities | 12,460 | 13,151 | |
| Fixed and variable rate income securities | 40,899 | 37,658 | |
| Collective investment schemes | 7,144 | 6,094 | |
| 36 | 65,993 | 61,524 | |
| Deferred tax assets | 28 | − | 81 |
| Insurance assets Reinsurers' share of insurance contract liabilities |
20 | 2,939 | 2,860 |
| Reinsurance receivables | 263 | 264 | |
| Insurance contract receivables | 19 | 17 | |
| 3,221 | 3,141 | ||
| Current tax | 28 | 5 | 44 |
| Prepayments and accrued income | 603 | 622 | |
| Other receivables | 39 | 174 | 781 |
| Cash and cash equivalents | 40 | 9,188 | 6,081 |
| Total assets | 83,564 | 76,936 |
Business and strategy
for the year ended 31 December 2010
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Cash flows from operating activities | |||
| Cash generated/(absorbed) by operations | 41.1 | 3,392 | (357) |
| Taxation recovered | 3 | 37 | |
| Net cash flows from operating activities | 3,395 | (320) | |
| Cash flows from investing activities | |||
| On acquisition of the Pearl businesses | 41.2 | − | 6,146 |
| Purchase of property, plant and equipment | (3) | − | |
| Interest received | − | 2 | |
| Net change in cash invested in trust account | − | 591 | |
| Net cash flows from investing activities | (3) | 6,739 | |
| Cash flows from financing activities | |||
| Gross proceeds from issue of share capital | 33 | − | |
| Repayment on redemption of shares | − | (41) | |
| Proceeds from issuing shares in subsidiaries to non-controlling interests | 96 | − | |
| Repurchase of shares in subsidiaries from non-controlling interests | − | (3) | |
| Partial buy back of non-controlling interests | (4) | − | |
| Proceeds of new borrowings | − | 42 | |
| Ordinary share dividends paid | (43) | − | |
| Coupon on Perpetual Reset Capital Securities paid | (62) | − | |
| Dividends paid to non-controlling interests | (18) | (8) | |
| Interest paid on borrowings | (122) | (221) | |
| Repayment of borrowings | (165) | (110) | |
| Net cash flows from financing activities | (285) | (341) | |
| Net increase in cash and cash equivalents | 3,107 | 6,078 | |
| Cash and cash equivalents at the beginning of the year | 6,081 | 2 | |
| Effect of exchange rate changes on cash and cash equivalents | − | 1 | |
| Cash and cash equivalents at the end of the year | 40 | 9,188 | 6,081 |
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 2010
| Share capital (note 16) £m |
Share premium £m |
Other reserves £m |
Shares held by the employee trust and group entities (note 17) £m |
Foreign currency translation reserve £m |
Retained earnings £m |
Total £m |
Non controlling interests (note 19) £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|---|
| At 1 January 2010 | − | 859 | 257 | (4) | 93 | 207 | 1,412 | 728 | 2,140 |
| Profit for the year | − | − | − | − | − | 30 | 30 | 50 | 80 |
| Other comprehensive income for the year | − | − | − | − | − | 76 | 76 | − | 76 |
| Total comprehensive income for the year | − | − | − | − | − | 106 | 106 | 50 | 156 |
| Dividends paid on ordinary shares | − | (34) | (20) | − | − | − | (54) | − | (54) |
| Dividends paid to non-controlling interests | − | − | − | − | − | − | − | (18) | (18) |
| Coupon paid to non-controlling interests, net of tax relief |
− | − | − | − | − | − | − | (47) | (47) |
| Issue of share capital | − | 33 | − | − | − | − | 33 | − | 33 |
| Shares issued in lieu of dividends | − | 11 | − | − | − | − | 11 | − | 11 |
| Issue of ordinary shares – Chairman's shares | − | 1 | − | − | − | (1) | − | − | − |
| Conversion of contingent rights over shares Credit to equity for equity-settled |
− | 230 | (230) | (3) | − | − | (3) | − | (3) |
| share-based payment | − | − | − | − | − | 8 | 8 | − | 8 |
| Conversion of warrants into ordinary shares | − | 9 | (2) | − | − | − | 7 | − | 7 |
| Shares in subsidiaries subscribed for by non-controlling interests |
− | − | − | − | − | − | − | 96 | 96 |
| Partial buy back of non-controlling interest | − | − | − | − | − | − | − | (19) | (19) |
| Restructure of non-controlling interests | − | − | − | − | − | 70 | 70 | (70) | − |
| Shares acquired by employee trust | − | − | − | (10) | − | − | (10) | − | (10) |
| Shares distributed by employee trust | − | − | − | 4 | − | (4) | − | − | − |
| At 31 December 2010 | − | 1,109 | 5 | (13) | 93 | 386 | 1,580 | 720 | 2,300 |
Performance
Business and strategy
for the year ended 31 December 2009
| Share capital (note 16) £m |
Share premium £m |
Other reserves £m |
Shares held by the employee trust (note 17) £m |
Foreign currency translation reserve £m |
Retained earnings £m |
Total £m |
Non controlling interests (note 19) £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|---|
| At 1 January 2009 | − | 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 Contingent rights over shares: shares |
− | (41) | − | − | − | − | (41) | − | (41) |
| 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 in subsidiaries from non-controlling interests |
− | − | − | − | − | − | − | (3) | (3) |
| At 31 December 2009 | − | 859 | 257 | (4) | 93 | 207 | 1,412 | 728 | 2,140 |
Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands 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.
Retained earnings comprises the owners' interest in the post-acquisition retained earnings of the subsidiary companies and the retained earnings of the Company. Distribution of the retained earnings held within the long term business funds and surplus assets held within the owners' funds of the life companies is subject to retaining sufficient funds to protect policyholders' interests. There is a restriction on the ability of certain subsidiary companies to distribute funds to Phoenix Group Holdings as a result of restrictions imposed by the Group's two main credit agreements.
for the year ended 31 December 2010
The consolidated financial statements for the year ended 31 December 2010 comprise the financial statements of Phoenix Group Holdings ('the Company') and its subsidiaries (together referred to as 'the Group').
The consolidated financial statements have been prepared on a historical cost basis except for investment property, owner-occupied property, and those financial assets, financial liabilities and insurance and investment contracts with DPF that have been measured at fair value.
The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS') and also in accordance with 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.
Assets and 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 IFRS 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 unit holders. 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 recognised in the consolidated income statement. Directly attributable acquisition costs are included within administrative expenses except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities 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.
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.
information
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 43.
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 the carrying value of deferred tax 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 at the date of translation. 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.
Performance
Business and
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 FSA Handbook for Insurers. The liability for insurance contracts 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 on individual policies:
The principal assumptions are given in note 43.
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 in accordance with the FSA's realistic capital regime. The key aspects of this methodology are:
The principal assumptions are given in note 43.
Where a group company enters into a financial guarantee contract to guarantee the indebtedness of other companies within the Group, the Group considers these to be insurance arrangements and accounts for them as such. On this basis the Group only recognises a liability in circumstances whereby it is likely a payment will need to be made under the terms of the guarantee.
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 present value of future profits ('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 43.
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 Insurance Contracts, 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 line item 'Unallocated surplus' represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts. The with-profit funds are closed to new business and as permitted by IFRS 4, the whole of the unallocated surplus has been classified as a liability (either within insurance contract liabilities or unallocated surplus).
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:
Additional information
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, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'deposits received from reinsurers' within the statement of consolidated financial position.
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, derivative and reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at amortised cost, which in the case of cash is equivalent to cost.
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. As required by IFRIC 14 to the extent that the economic surplus will be available as a refund the scheme assets are stated after a provision for tax that would be borne by the scheme administrators when the refund is made.
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, past service cost, curtailments and settlements (recognised within administrative expenses in the consolidated income statement), the interest cost on the liabilities less the expected return on assets, including any reimbursement assets (recognised within net investment income in the consolidated income statement), actuarial gains and losses (recognised in other comprehensive income) and employer contributions. All actuarial gains and losses are recognised in full.
Part of the cost of changes in the longevity assumptions of the PGL pension scheme is recoverable from certain withprofit funds to the extent that cash contributions are made to the pension scheme. Recoveries are recognised when the related cash contributions are agreed with the Trustee of the pension scheme and are accounted for as a transfer to other comprehensive income from insurance contract liabilities.
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.
Additional information
Intangible assets with finite lives are amortised on a straight-line basis over their useful economic lives 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.
Equities, fixed and variable rate income securities and collective investment schemes are designated 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.
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 contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.
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 in 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 providers. 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. The reinsurers' share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
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 payables 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.
responsibilit
Performance
Additional information
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 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. As permitted by Cayman Islands Companies Law, dividends have been charged within equity against share premium account and other reserves account. Where shareholders exercise a scrip dividend option the amount of the related dividend is credited to share premium in the statement of consolidated changes in equity and an amount equal to the nominal value of the shares issued is transferred from share premium to share capital.
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.
Fee and commission income relates to the following:
– other fees, which are recognised as the services are provided.
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 payment 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.
Fair value 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 claims payable on death are recognised 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 nonmarket-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 payable is recognised in the consolidated income statement as it accrues and is calculated by using the effective interest method.
The Group has issued ordinary shares which are 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 or a group entity acquires shares in the Company 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 the employee trust and group entities are charged or credited to the own shares account in equity. Currently, 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 business has been closed to new business for a number of years and is in run-off. The results are included within other operating income in 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 2010, set out on pages 88 to 169, were authorised by the Board of Directors for issue on 28 March 2011. The financial statements have been prepared in accordance with IFRS adopted for use by the EU and also in accordance with Part 9, Book 2, of the Netherlands Civil Code.
In preparing the consolidated financial statements the Group has adopted the following standards, interpretations and amendments which have been issued by the International Accounting Standards Board and have been adopted for use by the EU. None of these have a material effect on the results of the Group.
The International Accounting Standards Board has issued the following standards, interpretations and amendments which, subject to adoption for use by the EU, apply from the dates shown. The Group has decided not to early adopt any of these standards, interpretations or amendments where this is permitted. The impact of adopting them is subject to evaluation but is currently not expected to have a material effect on the results of the Group:
In addition, the following standards, interpretations and amendments have been issued but are not currently relevant to the Group:
Additional information
With effect from 28 August 2009, the Company acquired 100% of the issued share capital of PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) 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 was purchased by Pearl Group Holdings (No. 2) 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.
The consolidated performance statements and associated notes to the accounts for the year ended 31 December 2009 therefore incorporate the results of the acquired Pearl businesses for the four month post-acquisition period only.
On 2 September 2009, the date of legal completion of the acquisition, certain external debt of the Pearl businesses was restructured as an integral part of the acquisition transaction, 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 tranches of £37.5 million each of 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 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 are sourced in the UK.
Predominantly all non-current assets are located in the UK.
No revenue transaction with a single customer amounts to greater than 10% of the Group's revenue.
4.1 Segmental result
| IGNIS Asset Unallocated Phoenix Life Management group Eliminations £m £m £m £m Net premiums written from: External customers 1,449 − − − Other segment − − − − 1,449 − − − Fees from: External customers 100 62 − − Other segment − 82 − (82) 100 144 − (82) Net investment income: Recurring 5,877 − 35 − 5,912 Offset interest income on interest swaps against interest expenses* − − (53) − (53) Non-recurring (5) − − − (5) 5,872 − (18) − 5,854 Other operating income: |
2010 | |||
|---|---|---|---|---|
| Total £m |
||||
| 1,449 | ||||
| − | ||||
| 1,449 | ||||
| 162 | ||||
| − | ||||
| 162 | ||||
| Recurring 25 − − − |
25 | |||
| Net income 7,446 144 (18) (82) |
7,490 | |||
| Net policyholder claims and benefits incurred: | ||||
| Recurring (5,292) − − − |
(5,292) | |||
| Non-recurring (64) − − − |
(64) | |||
| (5,356) − − − |
(5,356) | |||
| Depreciation and amortisation: | ||||
| Depreciation of property, plant and equipment − (3) − − |
(3) | |||
| Amortisation of acquired in-force business (147) − − − |
(147) | |||
| Amortisation of customer relationships (15) (3) − − |
(18) | |||
| (162) (6) − − |
(168) | |||
| Other operating expenses: | ||||
| Recurring (1,616) (95) (40) 82 |
(1,669) | |||
| Non-recurring (38) − (32) − |
(70) | |||
| (1,654) (95) (72) 82 |
(1,739) | |||
| Total operating expense (7,172) (101) (72) 82 |
(7,263) | |||
| Profit/(loss) before finance costs and tax 274 43 (90) − |
227 | |||
| Finance costs (101) − (168) − |
(269) | |||
| Offset interest income on interest swaps against interest expense* − − 53 − |
53 | |||
| (101) − (115) − |
(216) | |||
| Profit before tax 173 43 (205) − |
11 | |||
| Tax attributable to policyholders' returns (5) − − − |
(5) | |||
| Segmental result before the tax attributable to owners 168 43 (205) − |
6 |
* The Group has entered into derivatives to protect the Group's net exposure to interest rate fluctuations and this reallocation derives the net economic interest exposure of the Group.
| 2009 | |||||
|---|---|---|---|---|---|
| Phoenix Life £m | IGNIS Asset Management £m |
Unallocated group £m |
Eliminations £m | Total £m |
|
| Net premiums written from: | |||||
| 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: | |||||
| Recurring | 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 customer relationships | (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 |
Business and strategy
4.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result 2010
| Phoenix Life £m |
IGNIS Asset Management £m |
Unallocated group £m |
Eliminations £m |
Total £m |
|
|---|---|---|---|---|---|
| Operating profit/(loss) before adjusting items | 388 | 46 | (61) | − | 373 |
| Investment return variances and economic assumption changes | |||||
| on long-term business | 18 | − | − | − | 18 |
| Variance on owners' funds | 16 | − | 3 | − | 19 |
| Amortisation of acquired in-force business | (132) | − | − | − | (132) |
| Amortisation of customer relationships | (15) | (3) | − | − | (18) |
| Non-recurring items | (107) | − | (32) | − | (139) |
| Financing costs attributable to owners | − | − | (115) | − | (115) |
| Segment result before the tax attributable to owners | 168 | 43 | (205) | − | 6 |
Non-recurring items include:
| Phoenix Life £m |
IGNIS Asset Management £m |
Unallocated group £m |
Eliminations £m |
Total £m |
|
|---|---|---|---|---|---|
| Operating profit/(loss) before adjusting items | 285 | 14 | (17) | − | 282 |
| Investment return variances and economic assumption changes on | |||||
| long-term business | 145 | − | − | − | 145 |
| Variance on owners' funds | 9 | − | (79) | − | (70) |
| Amortisation of acquired in-force business | (45) | − | − | − | (45) |
| Amortisation of customer relationships | (6) | (1) | − | − | (7) |
| Non-recurring items | (101) | (4) | − | − | (105) |
| Financing costs attributable to owners | − | − | (49) | − | (49) |
| Segment result before the tax attributable to owners | 287 | 9 | (145) | − | 151 |
Non-recurring items included:
| Assets 2010 £m |
Liabilities 2010 £m |
Assets 2009 £m |
Liabilities 2009 £m |
|
|---|---|---|---|---|
| Phoenix Life | 83,168 | 78,120 | 76,633 | 71,652 |
| IGNIS Asset Management | 337 | 128 | 303 | 120 |
| Unallocated Group | 59 | 3,016 | − | 3,024 |
| 83,564 | 81,264 | 76,936 | 74,796 |
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.
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 impact of the reduction in credit spreads on corporate bonds and equity, property and yield movements.
For non-long-term business including owners' funds, the total investment income, including fair value 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:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Variances on owners' funds of: | ||
| Subsidiary undertakings | 7 | 9 |
| The Company | 12 | (79) |
| 19 | (70) |
The variances on owners' funds of the Company comprises fair value gains/(losses) arising from movements in the fair value of warrants in issue over the Company's shares.
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:
| 2010 % | 2009 % | |
|---|---|---|
| Equities | 7.6 | 6.3 |
| Property | 6.6 | 5.8 |
| Gilts (15 year gilt) | 4.5 | 3.7 |
| Other fixed interest (15 year gilt plus 0.6%) | 5.1 | 4.3 |
| 2010 | 2009 | |
|---|---|---|
| £m | £m | |
| Fund management based fees | 62 | 30 |
| Investment contract income | 100 | 71 |
| 162 | 101 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Investment income | ||
| Interest income on loans and receivables | 57 | 76 |
| Interest income on impaired financial assets | 5 | − |
| Interest income on financial assets designated at fair value through profit or loss | ||
| on initial recognition | 1,911 | 818 |
| Dividend income | 492 | 321 |
| Rental income | 78 | 52 |
| Net expected return on pension assets | (18) | (9) |
| 2,525 | 1,258 | |
| Impairment losses on loans and receivables | (12) | − |
| Fair value gains/(losses) | ||
| Financial assets at fair value through profit or loss | ||
| Held for trading – derivatives | (17) | (385) |
| Designated upon initial recognition | 3,324 | − |
| Investment property | 87 | 159 |
| 3,382 | (226) | |
| Net investment income | 5,907 | 1,032 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| General business result | − | 2 |
| Income received from outsourcer | 14 | − |
| Income under Royal London transitional services agreement | 5 | 31 |
| Insurance claim | − | 11 |
| Other income | 6 | 23 |
| 25 | 67 |
Business and strategy
information
Additional information
| 9. Acquisition costs | |||
|---|---|---|---|
| -- | -- | ---------------------- | -- |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Acquisition costs paid | 12 | 8 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Employee costs | 158 | 65 |
| Outsourcer expenses | 147 | 58 |
| Investment management expenses and transaction costs | 142 | 73 |
| Non-recurring administrative expenses | 70 | 27 |
| Operating expenses in respect of investment properties | 4 | 11 |
| Depreciation of property, plant and equipment | 3 | 2 |
| Other | 152 | 19 |
| 676 | 255 |
Other expenses mainly comprise professional fees, information technology expenses and other general expenses.
Employee costs comprise:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Wages and salaries | 134 | 56 |
| Social security contributions | 13 | 5 |
| Other pension costs | 11 | 4 |
| 158 | 65 | |
| 2010 Number | 2009 Number | |
| Average number of persons employed | ||
| Phoenix Life | 758 | 875 |
| IGNIS Asset Management | 520 | 534 |
| 1,278 | 1,409 |
The average number of employees for the year ended 31 December 2009 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 £13.6 million (2009: £7.2 million). No services were provided by the auditors of the Company to associated pension schemes.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Audit of the consolidated financial statements | 0.7 | 0.8 |
| The auditing of accounts of associates of the Company pursuant to legislation | 3.5 | 3.5 |
| Other services supplied pursuant to such legislation: | ||
| Audit related | 0.7 | 0.7 |
| Services as reporting accountants | 6.6 | 0.2 |
| Other services: | ||
| Audit of MCEV supplementary information | 0.8 | 0.6 |
| Other | 1.3 | 1.4 |
| 13.6 | 7.2 |
The total remuneration of the auditors of the Company for services as reporting accountants mainly comprised services provided in respect of the premium listing.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Interest expense | ||
| On borrowings at amortised cost | 196 | 64 |
| On borrowings at fair value through profit or loss | 73 | 23 |
| 269 | 87 | |
| Attributable to: | ||
| – policyholders | 101 | 22 |
| – owners | 168 | 65 |
| 269 | 87 | |
| 13. Tax (credit)/charge | ||
| 13.1 Current year tax (credit)/charge | ||
| 2010 | 2009 | |
| £m | £m | |
| Current tax: | ||
| UK Corporation tax | 30 | (15) |
| Overseas tax | 7 | 5 |
| 37 | (10) | |
| Adjustment in respect of prior years | 16 | (3) |
| 53 | (13) | |
| Deferred tax: | ||
| Reversal/origination of temporary differences | ||
| On non-profit surpluses | (32) | (51) |
| On amortisation of acquired in-force business | (50) | (17) |
| On amortisation of customer relationship intangible | (5) | − |
| 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 |
| On accrued interest | (38) | − |
| Losses on group restructuring not matched in accounts | (33) | − |
| Tax losses arising in the current year carried forward | (17) | (26) |
| Pension scheme movements | 19 | 16 |
| On provisions for future expenditure | (6) | (12) |
| Utilisation of tax losses | 57 | 63 |
| Change in the rate of corporation tax Write down of deferred tax assets |
(19) 2 |
− − |
| (122) | (31) | |
| Total tax credit | (69) | (44) |
| Attributable to: | ||
| – policyholders | 5 | (60) |
| – owners | (74) | 16 |
| (69) | (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 charge/(benefit) attributable to policyholder earnings was £5 million (2009: £(60) million).
| 2010 £m |
2009 £m |
|
|---|---|---|
| Deferred tax on actuarial gains of defined benefit schemes | (4) | 31 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Profit before tax | 11 | 91 |
| Policyholder tax (charge)/credit | (5) | 60 |
| Profit before the tax attributable to owners | 6 | 151 |
| Tax at standard UK* rate of 28% | 2 | 42 |
| Net tax losses on group restructuring not matched in accounts | (110) | (63) |
| Untaxed income and gains | (61) | − |
| Disallowable expenses | 18 | 10 |
| Adjustment to tax charge in respect of prior years | 16 | (3) |
| Movement in non-profit surplus taxed at less than 28% | 20 | (51) |
| Policyholder tax calculation methodology | − | 48 |
| Tax relief on accrued interest not valued | − | 11 |
| Profits taxed at rates other than 28% | (3) | 12 |
| Tax losses not previously valued | (8) | − |
| Prior year deferred tax | 12 | − |
| Deferred tax rate change | (19) | − |
| Current year losses not valued | 41 | − |
| Deductible temporary differences not valued | 11 | − |
| Other | 7 | 10 |
| Owners' tax (credit)/charge | (74) | 16 |
| Policyholder tax charge/(credit) | 5 | (60) |
| Total tax credit for the year | (69) | (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.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Dividends declared and paid in 2010 | 54 | − |
On 30 March 2010, the Board declared a dividend of €0.17 per share in respect of the year ended 31 December 2009. The total dividend amounted to £20 million and was paid on 15 April 2010.
On 27 August 2010, the Board declared an interim dividend of £0.21 per share. A scrip dividend option was available to shareholders and the dividend that was settled on 15 October 2010 amounted to £34 million. The value of the dividend that settled via the scrip dividend option was £11 million.
The profit attributable to owners for the purposes of calculating earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Profit for the year | 80 | 135 |
| Share of result attributable to non-controlling interests | (50) | (40) |
| Profit attributable to owners | 30 | 95 |
Performance
Business and strategy
The basic earnings per share of 20.1p (2009: 102.9p) has been based on the profit of £30 million (2009: £95 million) and a weighted average number of ordinary shares outstanding during the year of 149 million (2009: 92 million), calculated as follows:
| 2010 Number million |
2009 Number million |
|
|---|---|---|
| Issued ordinary shares at beginning of the year | 130 | 53 |
| Effect of ordinary shares issued/redeemed | 19 | 39 |
| Weighted average number of ordinary shares | 149 | 92 |
The diluted earnings per share of 20.1p (2009: 89.8p) has been based on the profit of £30 million (2009: £95 million) and a diluted weighted average number of ordinary shares outstanding during the year of 149 million (2009: 106 million) calculated as follows:
| 2010 Number million |
2009 Number million |
|
|---|---|---|
| Weighted average number of ordinary shares | 149 | 92 |
| Effect of warrants in issue | − | 14 |
| Weighted average number of ordinary shares (diluted) | 149 | 106 |
The Founders', Sponsors' and IPO warrants were not dilutive in 2010 due to the exercise price of the warrants being significantly higher than the share price of the Company. In light of the current share price of the Company, it is considered unlikely that the warrants will vest. The Founders' and Sponsors' warrants were converted into ordinary shares during 2010.
In 2009, the Founders', Sponsors' and IPO warrants were dilutive up until 2 September 2009 and had the effect of increasing the weighted average number of ordinary shares in calculating the diluted weighted average 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, due to their exercise price, they do not have a dilutive effect for the periods presented:
Details of the warrants are given in note 24.
On 2 September 2009 the Company issued 36,000,000 contingent rights over its shares, none of which have been included in diluted earnings per share figures as none of the conditions were satisfied and therefore no shares would have been issued. On 5 July 2010, the Company completed the restructure of these contingent rights over shares which saw 32,400,000 of the contingent rights over shares converted into the same number of ordinary shares and the holders of the contingent rights over shares become entitled to receive a further 3,600,000 ordinary shares in aggregate if before 22 June 2013 (i) an offer is made to acquire all or a majority of the Company's issued ordinary share capital or substantially all of the Company's assets (in each case such transaction having become unconditional in all respects); or (ii) any party or parties acting in concert becomes interested in more than 50% of the ordinary shares of the Company through the issue of shares by the Company. As the conditions of this entitlement were not met in the period, these additional shares have not been included in the diluted earnings per share figures.
| 2010 £ |
2009 £ |
|
|---|---|---|
| Authorised: | ||
| 410 million (2009: 300 million) ordinary shares of €0.0001 each | 31,750 | 22,050 |
| Nil (2009: 110 million) 'B' ordinary shares of €0.0001 each | − | 9,700 |
| 31,750 | 31,750 | |
| Issued and fully paid: | ||
| 171.5 million (2009: 80.4 million) ordinary shares of €0.0001 each | 13,904 | 6,067 |
| Nil (2009: 49.8 million) 'B' ordinary shares of €0.0001 each | − | 4,383 |
| 13,904 | 10,450 |
In connection with the Company's Premium listing, all 52,032,123 issued and fully paid 'B' ordinary shares were converted into ordinary shares on 5 July 2010 by way of a variation of rights and re-designation on a one-for-one basis. The holders of the ordinary shares 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. Prior to this, the holders of the ordinary and 'B' ordinary shares had identical rights to returns and voting.
Movements in issued share capital during the year:
| Number | £ | |
|---|---|---|
| Shares in issue at 1 January | 130,200,732 | 10,450 |
| 'B' ordinary shares issued on conversion of warrants | 2,085,123 | 177 |
| 'B' ordinary shares issued to the Chairman | 177,000 | 16 |
| Ordinary shares issued on conversion of contingent rights over shares | 32,400,000 | 2,677 |
| Ordinary shares issued for scrip dividend (note 14) | 1,567,416 | 138 |
| Ordinary shares issued in connection with Alternative Coupon Satisfaction Mechanism | 5,020,000 | 445 |
| Other ordinary shares issued in the year | 5,339 | 1 |
| Shares in issue at 31 December | 171,455,610 | 13,904 |
| 2009 | ||
|---|---|---|
| Number | £ | |
| Shares in issue at 1 January | 75,000,000 | 5,583 |
| '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 |
On 13 January 2010, 147,925 'B' ordinary shares were issued and on 15 January 2010, a further 1,937,198 'B' ordinary shares were issued totalling 2,085,123. Both of these issues were pursuant to the exchange invitation for the insiders' warrants and were issued at a premium of £9 million.
On 31 March 2010, 177,000 'B' ordinary shares were issued to the Chairman at a premium of £1 million. As announced previously, the Chairman had the entitlement under his letter of appointment to an award of 300,000 'B' ordinary shares. In order to satisfy this agreement, shares were issued representing the net of tax value, with the Group funding the relevant taxes.
On 5 July 2010, the Company completed the restructuring of the contingent rights over its shares. Under this restructuring the Company issued to each holder of contingent rights over shares 9 ordinary shares for every 10 ordinary shares that such holder would have received on crystallisation of the contingent rights over shares. 32,400,000 contingent rights over shares in issue were, therefore, converted into the same number of ordinary shares and were issued at a premium of £230 million.
On 22 October 2010, the Company implemented a placing in connection with the operation of the Alternative Coupon Satisfaction Mechanism ('ACSM') in respect of the 2009 deferred coupon on the £500 million Perpetual Reset Capital Notes issued by Pearl Group Holdings (No. 1) Limited ('PGH1'). The Company issued 5,020,000 new ordinary shares on 27 October 2010 at a premium of £33 million.
During the year, the Company issued a further 5,339 shares at a premium of £30,058.
Business and strategy
information
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 4 | − |
| Issued in year | − | 4 |
| Purchased in year | 10 | − |
| Vested to employees in year | (4) | − |
| Shares issued to group entity on conversion of contingent rights | 3 | − |
| At 31 December 2010 | 13 | 4 |
This reserve represents the value of the shares held by the Phoenix Group Holdings Employee Benefit Trust ('PGH EBT') to satisfy awards granted to employees under the Group's share-based payment schemes and shares held by group entities. During the year 1,580,671 further shares were purchased on market and 595,740 shares were awarded to employees (see note 18). The number of shares held by the PGH EBT at 31 December 2010 was 1,484,931 (2009: 500,000).
On 5 July 2010, the Company implemented a restructuring of the contingent rights over its shares as explained in note 16. As a result 383,188 shares were issued to Pearl Assurance Limited.
The expense recognised for employee services receivable during the year is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Expense arising from equity-settled share-based payment transactions | 8 | 3 |
| Expense arising from cash-settled share-based payment transactions | 1 | − |
| Total expense arising from share-based payment transactions | 9 | 3 |
The carrying amount of the liability relating to the cash-settled options at 31 December 2010 is £1 million (2009: £nil) and is included within other payables.
During 2010, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early vesting rights, these awards will be subject to performance conditions tied to the Company's financial performance in respect of growth in embedded value and cumulative cash generation over a three year period and will not vest until 28 May 2013. There are no cash settlement alternatives.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted.
Certain employees were granted nil-cost options to acquire an allocated number of ordinary shares during 2009. These options vested in full on achievement of the Company's premium listing. There were no cash settlement alternatives.
The fair value of these awards was estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted.
The SAYE scheme allows participating employees to save up to £250 each month over a period of either 3 or 5 years.
Under the SAYE arrangement, participants remaining in the Group's employment at the end of the 3 or 5 year saving period are entitled to use their savings to purchase shares at an exercise price of £5.63. Employees leaving the Group for certain reasons are able to use their savings to purchase shares within six months of their leaving before the end of their 3 and 5 year periods.
The fair value of the awards has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model included expected share price volatility and expected dividend yield.
The following information was relevant in the determination of the fair value of the SAYE awards in the year:
| Share price (£) | 6.50 |
|---|---|
| Exercise price (£) | 5.63 |
| Expected life (years) | 3.25 and 5.25 |
| Risk-free rate (%) | 2.0 (for 3.25 year scheme) and 2.8 (for 5.25 year scheme) based on UK Government |
| Gilts with a term commensurate with the expected term for each award. | |
| Expected volatility (%) | 30.0 which is based on the Company's share price volatility to date. |
| Dividend yield (%) | zero |
In 2009, certain employees were granted nil-cost options to acquire an allocated number of ordinary shares. There were no performance criteria associated with these awards and no cash settlement alternatives. The contractual life of the awards is 2 years.
With effect from 2 September 2009, a number of executives were given deferred cash awards the value of which will be equal to a fixed number of Phoenix Group Holdings shares on 2 September 2012 and will be payable on this date provided the executive remains in employment.
The fair value of the awards has been determined assuming that all granted shares vest. As the award is a cash settled scheme, the fair value of the expense is updated at every period and to reflect movements in the Phoenix Group Holdings share price.
For the year ended 31 December 2010 £nil has been recognised as a share-based payment charge (31 December 2009: £2 million).
On 15 January 2010 the remaining 4,000,000 outstanding Sponsors' warrants were converted into 727,271 ordinary shares.
On 24 September 2009 it was agreed to grant the Chairman 300,000 'B' ordinary shares as part of the remuneration package to secure his appointment. On 26 February 2010 it was agreed to modify the terms of the award. On 31 March 2010 177,000 'B' ordinary shares were issued and a cash payment of £1 million was made. The effect of this modification is to leave the 2009 charge of £2.5 million unchanged and to recognise a reduction in equity for the cash payment to settle the tax liability associated with the award of the shares.
The following table illustrates the number of, and movements in, share options during the year:
| No of share options 2010 | No of share options 2009 | ||||||
|---|---|---|---|---|---|---|---|
| 2009 LTIP | 2009 BSP Deferred cash plan | 2010 LTIP | SAYE | 2009 LTIP | 2009 BSP | ||
| Outstanding at the | |||||||
| beginning of the year | 403,750 | 403,750 | − | − | − | − | − |
| Granted during the year | 70,297 | 40,000 | 229,370 | 1,530,790 | 1,163,948 | 403,750 | 403,750 |
| Forfeited during the year | − | − | − | (106,241) | (121,395) | − | − |
| Exercised during the year | (474,047) | (117,500) | − | − | (5,339) | − | − |
| Outstanding at the end | |||||||
| of the year | − | 326,250 | 229,370 | 1,424,549 | 1,037,214 | 403,750 | 403,750 |
The weighted average fair value of options granted during the year was £4.95 (2009: £8.42).
The weighted average share price at the date of exercise for the rewards exercised is £6.77 (2009: £nil).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2010 is 2.5 years (2009: 2.0 years).
| 2010 | |||
|---|---|---|---|
| Perpetual Reset Capital Securities £m |
UK Commercial Property Trust Limited £m |
Total £m |
|
| At 1 January | 527 | 201 | 728 |
| Profit for the year | 20 | 30 | 50 |
| Dividends paid | − | (18) | (18) |
| Restructure of non-controlling interest | (70) | − | (70) |
| Coupon paid, net of tax relief | (47) | − | (47) |
| Partial buyback of non-controlling interest | (19) | − | (19) |
| Shares in subsidiaries subscribed for by non-controlling interests | − | 96 | 96 |
| At 31 December | 411 | 309 | 720 |
| Perpetual Reset Capital Securities £m |
UK Commercial Property Trust Limited £m |
Total £m |
|
|---|---|---|---|
| At 1 January | − | − | − |
| 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 | 527 | 201 | 728 |
On 1 January 2010, PGH1 had 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 Group Capital Resources under the rules of the FSA. As the Notes are not 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.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment by the issue of securities ('ACSM instruments') by either PGH1 or a special purpose subsidiary of PGH1 established for the purpose of issuing ACSM instruments and which are guaranteed by PGH1. The obligations of PGH1 in respect of such securities will be subordinated to and rank or be expressed to rank junior to the Notes as to rights to payments of interest and participation in the assets of PGH1 in a winding-up and shall comply with the then current requirements of the FSA in relation to Tier 1 Capital. ACSM instruments will in the first instance be offered to related parties (as defined in the Terms and Conditions of the Notes as amended by the Supplemental Trust Deed dated 30 July 2008) and to third parties if not purchased by related parties. In the event that neither such related parties nor third parties will purchase the required ACSM instruments then PGH2 is required to use its best endeavours to raise such funds as are deemed necessary to purchase the required amounts of ACSM instruments.
Performance
Business and strategy
information
information
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 at that time.
On 22 April 2010, the holders of the Notes agreed to a number of amendments to the Notes, including a 15% reduction in the face value of the Notes, the amendment of the ACSM and the imposition of an additional restriction on the payment of dividends by the Company if future coupons are deferred. The 15% reduction in face value of the Notes emerges in the statement of consolidated financial position as a £70 million reduction in non-controlling interests representing the impact of this reduction on the Notes held by external noteholders. Following these amendments, PGH1 settled in full on 26 April 2010 the 2010 coupon due on the Notes and settled in full via the issue of ACSM instruments the 2009 coupon on 18 November 2010.
During the year the Company exercised a call option to acquire a number of the Notes from an external party for consideration of £4 million. This transaction has been recognised in the statement of consolidated financial position as a reduction of £19 million in non-controlling interests.
UK Commercial Property Trust Limited ('UKCPT') is a property investment subsidiary which is domiciled in Guernsey and is admitted to the Official List of the UK Listing Authority and to trading on the LSE.
| Gross liabilities 2010 |
Reinsurers' share 2010 |
Gross liabilities 2009 |
Reinsurers' share 2009 |
|
|---|---|---|---|---|
| £m | £m | £m | £m | |
| Life assurance business: | ||||
| Insurance contracts | 38,770 | 2,939 | 38,965 | 2,860 |
| Investment contracts with DPF | 11,709 | − | 11,326 | − |
| 50,479 | 2,939 | 50,291 | 2,860 | |
| Amounts due for settlement after 12 months | 42,376 | 2,719 | 40,150 | 2,722 |
| Gross liabilities 2010 £m |
Reinsurers' share 2010 £m |
Gross liabilities 2009 £m |
Reinsurers' share 2009 £m |
|
| At 1 January | 50,291 | 2,860 | − | − |
| On acquisition of the Pearl businesses | − | − | 51,413 | 2,689 |
| Premiums | 1,534 | 85 | 545 | 31 |
| Claims | (5,260) | (210) | (2,043) | (105) |
| Other changes in liabilities | 3,978 | 214 | 361 | 216 |
| Foreign exchange adjustments | (37) | (10) | 15 | 29 |
| Transfer to statement of consolidated comprehensive income in respect of actuarial losses of defined benefit pension scheme |
(27) | − | − | − |
| At 31 December | 50,479 | 2,939 | 50,291 | 2,860 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 721 | − |
| On acquisition of the Pearl businesses | − | 546 |
| Transfer from income statement | 143 | 175 |
| At 31 December | 864 | 721 |
| Carrying value | Fair value | ||||
|---|---|---|---|---|---|
| 2010 £m |
2009 £m |
2010 £m |
2009 £m |
||
| Limited recourse bonds 2012 7.39% (note a) | 29 | 48 | 29 | 45 | |
| Limited recourse bonds 2022 7.59% (note a) | 94 | 86 | 97 | 93 | |
| £779 million loan (note b) | 757 | 764 | 766 | 751 | |
| £15 million loan (note c) | 14 | 15 | 15 | 14 | |
| £80 million facility agreement (note d) | 42 | 42 | 42 | 42 | |
| Refinancing loan (note e) | 234 | 258 | 234 | 258 | |
| £4 million loan (note f) | 4 | − | 4 | − | |
| Total policyholder borrowings | 1,174 | 1,213 | 1,187 | 1,203 | |
| £200 million 7.25% unsecured subordinated loan (note g) | 127 | 119 | 170 | 156 | |
| Unsecured loan notes (note h) | 12 | 18 | 12 | 18 | |
| £2,260 million syndicated loan (note i) | 2,138 | 2,260 | 2,138 | 2,260 | |
| £100 million PIK notes and facility (note j) | 106 | 102 | 106 | 102 | |
| £75 million secured loan note (note k) | 72 | 70 | 72 | 70 | |
| £425 million loan facility (note k) | 399 | 399 | 399 | 399 | |
| Total shareholder borrowings | 2,854 | 2,968 | 2,897 | 3,005 | |
| Total borrowings | 4,028 | 4,181 | 4,084 | 4,208 | |
| Amount due for settlement after 12 months | 3,838 | 4,086 |
information
Additional information
The borrowings under the £2,260 million facility are secured by:
During 2010, a voluntary repayment of £122 million was made.
(j) On 14 May 2008, PGH (MC1) Limited issued PIK notes to the value of £154.5 million to Royal London and PGH (MC2) Limited obtained a £154.5 million PIK facility from Royal London. On 2 September 2009, £250 million in aggregate of the PIK notes and the facility outstanding (comprising principal and capitalised interest) was assigned to Phoenix Group Holdings in exchange for the issue of 1.5 million 'B' ordinary shares and 12.36 million warrants. Interest accrues on the PIK notes and facility at LIBOR plus a margin of 2% unless an election is made by PGH (MC1) Limited or PGH (MC2) Limited to capitalise the interest, in which case the margin increases to 3.5%. During 2010, interest of £4 million (2009: £2 million) was capitalised on the PIK notes and facility. The final maturity date on the PIK notes and facility is 30 June 2019.
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).
During the year, interest of £2 million was capitalised on the £75 million secured loan note.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Carrying value and fair value: | ||
| At 31 December | 419 | 431 |
| Amount due for settlement after 12 months | 384 | 394 |
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 in the statement of consolidated financial position as either an asset or an associated liability. The total value of the collateral held under such arrangements in respect of reinsurance treaties was £1,898 million (2009: £1,846 million).
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:
| Assets 2010 £m |
Liabilities 2010 £m |
Assets 2009 £m |
Liabilities 2009 £m |
|
|---|---|---|---|---|
| Warrants over shares in Phoenix Group Holdings | − | 5 | − | 23 |
| Forward currency | 641 | 692 | 189 | 181 |
| Credit default options | 3 | 11 | 4 | 29 |
| Interest rate swaps | 1,991 | 1,685 | 1,683 | 1,430 |
| Swaptions | 241 | − | 285 | − |
| Inflation swaps | 26 | 2 | 20 | 2 |
| Total return bond swaps | 73 | 24 | 27 | − |
| Equity options | 186 | − | 191 | − |
| Stock index futures | 36 | 12 | 1,141 | 1,177 |
| 3,197 | 2,431 | 3,540 | 2,842 |
The amount recoverable after one year is £2,247 million (2009: £2,143 million). The amount payable after one year is £1,517 million (2009: £1,394 million).
It is the Group's practice to obtain collateral to mitigate the counterparty risk related to derivative transactions, usually in the form of cash or marketable securities.
Additional information
Where the Group receives collateral in the form of marketable securities which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of financial position. The fair value of financial assets accepted as collateral but not recognised in the statement of financial position amounts to £313 million (2009: £188 million).
Where the Group receives collateral on derivatives in the form of cash it is recognised in the statement of financial position along with a corresponding liability to repay the amount of the collateral received, disclosed as 'Obligations for the repayment of collateral received'. The amount recognised as a financial asset and a financial liability at 31 December 2010 is £818 million (2009: £1,041 million) and £821m (2009: £1,099 million) respectively.
Where the Group pledges collateral in the form of cash or marketable securities and retains all the risks and rewards of the transferred assets, they continue to be recognised in the statement of financial position. The value of assets pledged at 31 December 2010 amounted to £500 million (2009: £455 million).
On 1 January 2009, the Company had in issue 15 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 warrants Number |
Founders' warrants Number |
Lenders' warrants Number |
Royal London warrants Number |
|
|---|---|---|---|---|
| At 1 January | 8,169,868 | 7,468,200 | 5,000,000 | 12,360,000 |
| Conversion of Founders' warrants into new ordinary shares | ||||
| (January 2010) | − | (7,468,200) | − | − |
| At 31 December | 8,169,868 | − | 5,000,000 | 12,360,000 |
| IPO warrants Number |
Founders' warrants Number |
Lenders warrants Number |
Royal London warrants Number |
|
|---|---|---|---|---|
| At 1 January | 60,000,000 | 15,000,000 | − | − |
| Forfeiture of Founders' warrants and shares (2 September 2009) | − | (63,600) | − | − |
| Conversion of 50% of outstanding warrants into ordinary shares | ||||
| (2 September 2009) | (30,000,000) | (7,468,200) | − | − |
| Issue of warrants to Royal London and Lenders (2 September 2009) | − | − | 5,000,000 | 12,360,000 |
| Conversion of IPO warrants into new ordinary shares | ||||
| (31 December 2009) | (21,830,132) | − | − | − |
| At 31 December | 8,169,868 | 7,468,200 | 5,000,000 | 12,360,000 |
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 and on 15 October 2010, following an issue of ordinary shares by the Company under a scrip dividend, the terms of the IPO warrants were amended to entitle the holder to purchase 1.009507 ordinary shares per IPO warrant and the exercise price was reduced to €10.90.
During January 2010, the remaining Founders' warrants in issue were converted into ordinary shares. On 5 July 2010, the IPO warrants were admitted to trading on the London Stock Exchange. The IPO warrants were subsequently delisted from Euronext on 17 November 2010.
The exercise period for both the IPO and Founders' warrants commenced on the later of:
The warrants will expire at the close of trading on the London Stock Exchange 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 to do so on a cashless basis.
The IPO warrants are listed and were previously valued using the warrant price quoted on the London Stock Exchange for the Company. Due to the relatively low number of IPO warrants in issue, they are thinly traded and the quoted price is not considered to be the best indicator of their fair value. As a result the IPO warrants have been valued using an extended Black-Scholes valuation model. The key assumptions used to ascertain a value as at 31 December 2010 are as follows:
At 31 December 2010 the Founders' warrants were valued at £nil million (2009: £7 million) and the IPO warrants were valued at £2 million (2009: £8 million).
On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one 'B' ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company's Premium Listing on 5 July 2010, the Lenders' warrants relate to ordinary shares rather than 'B' ordinary shares. On 15 October 2010, following an issue of ordinary shares by the Company under a scrip dividend, the terms of the warrants were amended to entitle the holder to purchase 1.009507 ordinary shares per warrant.
The exercise period terminates on the first to occur of:
All outstanding Lenders' 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. On 15 October 2010, this threshold of £19.50 was amended to £19.32. 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.
Performance
Additional information
These Lenders' warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value are the same as for the IPO warrants (see above). The value of the warrants at the year end was £280,000 (2009: £2 million).
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 entitled the holder to purchase one 'B' ordinary share at a price of €11 per share, subject to adjustment. Following the achievement of the Company's Premium Listing, the Royal London warrants relate to ordinary shares rather than 'B' ordinary shares. On 15 October 2010, following an issue of ordinary shares by the Company under a scrip dividend, the terms of the warrants were amended to entitle the holder to purchase 1.009507 ordinary shares per warrant.
The exercise period terminates on the first to occur 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. On 15 October 2010, this threshold of €16.50 was amended to €16.34. 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 an extended Black-Scholes valuation model.
The key assumptions used to ascertain a value as at 31 December 2010 are as for the IPO warrants (see above). The value of the warrants at the year end was £3 million (2009: £6 million).
| 2010 £m |
2009 £m |
|
|---|---|---|
| Carrying value and fair value: | ||
| At 31 December | 10,160 | 4,106 |
| Amount due for settlement after 12 months | 628 | 1,054 |
| Carrying value | Fair value | |||
|---|---|---|---|---|
| 2010 £m |
2009 £m |
2010 £m |
2009 £m |
|
| Financial liabilities at fair value through profit or loss: | ||||
| Designated upon initial recognition | 11,020 | 9,774 | 11,020 | 9,774 |
| Held for trading – derivatives | 2,431 | 2,842 | 2,431 | 2,842 |
| Financial liabilities measured at amortised cost | 14,373 | 8,460 | 14,376 | 8,487 |
| 27,824 | 21,076 | 27,827 | 21,103 | |
| Amount due for settlement after 12 months | 6,366 | 6,928 |
| 2010 | ||
|---|---|---|
| Restructuring £m |
Leasehold properties £m |
Staff related £m |
Known incidents £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|---|
| At 1 January | 7 | 37 | 17 | 8 | 32 | 101 |
| Additions in the year | 1 | 8 | 5 | 2 | 3 | 19 |
| Utilised during the year | (4) | (6) | (4) | (8) | (3) | (25) |
| Released during the year | − | (2) | (1) | (1) | (18) | (22) |
| At 31 December | 4 | 37 | 17 | 1 | 14 | 73 |
The restructuring provision relates principally to the anticipated redundancy costs associated with the closure of the Group's Glasgow and Peterborough life operations. This provision is expected to be fully utilised within 12 months.
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 5.46% and it is expected that the provision will be utilised over the next 10 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 2 years.
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 are litigation and onerous contract provisions.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Current tax receivables | 5 | 44 |
| Net deferred tax assets | − | 81 |
| Total tax assets | 5 | 125 |
| Current tax payables | 99 | 103 |
| Net deferred tax liabilities | 569 | 776 |
| Total tax liabilities | 668 | 879 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Trading losses | 82 | 28 |
| Expenses and deferred acquisition costs carried forward | 86 | 142 |
| Provisions and other temporary differences | 20 | 30 |
| Pension scheme deficit | 21 | 34 |
| Accelerated capital allowances | 25 | 24 |
| Unpaid interest | 82 | 45 |
| Gross deferred tax assets | 316 | 303 |
| Less: offset against deferred tax liabilities | (316) | (222) |
| Net deferred tax assets | − | 81 |
Business and strategy
Additional information
| 2010 £m |
2009 £m |
|
|---|---|---|
| Acquired in-force business | 670 | 736 |
| Customer relationships | 114 | 123 |
| Unrealised gains on investments | − | 7 |
| Surplus within the non-profit funds | 64 | 96 |
| Provisions and other temporary differences | 17 | 19 |
| Adjustment for insurance policies held with related parties in respect of the | ||
| PGL Pension Scheme | 20 | 17 |
| Gross deferred tax liabilities | 885 | 998 |
| Less: offset against deferred tax assets | (316) | (222) |
| Net deferred tax liabilities | 569 | 776 |
| At 31 December | (569) | (695) |
|---|---|---|
| Amounts charged/(credited) to the statement of other comprehensive income | 4 | (31) |
| Amounts credited to the income statement | 122 | 31 |
| On acquisition of the Pearl businesses | − | (695) |
| At 1 January | (695) | − |
| 2010 £m |
2009 £m |
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.
A gradual reduction in the UK corporation tax rate from 28% to 24% over the next 4 years was announced in the Emergency Budget of 22 June 2010 with a further 1% reduction being announced in the Budget of 23 March 2011. The Finance (No. 2) Act 2010 included the first of the 1% rate reductions with effect from April 2011, with further reductions to be dealt with by future legislation. The benefit to the Group's net assets arising from the further 4% reduction of rate is estimated as £65 million in total and will be recognised as the legislation is substantively enacted.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Deferred tax assets have not been recognised in respect of: | ||
| Tax losses carried forward | 103 | 141 |
| Excess expenses and deferred acquisition costs carried forward | 22 | 50 |
| Provisions and other temporary differences | 7 | 3 |
| Deferred tax assets not recognised on capital losses* | 165 | 210 |
* These can only be offset against future capital gains and have no expiry date.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Payables related to direct insurance contracts | 713 | 759 |
| Amount due for settlement after 12 months | 40 | 66 |
Payables relating to direct insurance contracts includes claims outstanding on general insurance and life assurance. The general insurance element amounts to £263 million (2009: £254 million).
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.
Within Pearl Assurance Limited 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.
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.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Accruals | 214 | 177 |
| Amount due for settlement after 12 months | 9 | 4 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Investment broker balances | 187 | 420 |
| Other payables | 140 | 230 |
| 327 | 650 | |
| Amount due for settlement after 12 months | − | 8 |
The Group operates two main 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.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Pearl Group Staff Pension Scheme deficit | (77) | (121) |
| PGL Pension Scheme | ||
| Economic surplus (including £92 million available as a refund on a winding up of the scheme) | 165 | 62 |
| Provision for tax on that part of the economic surplus available as a refund on a winding up | ||
| of the scheme | (32) | − |
| Net economic surplus | 133 | 62 |
| Adjustment for insurance policies held with related parties and eliminated on consolidation | (74) | (66) |
| Reported surplus/(deficit) | 59 | (4) |
Additional information
Information on each of these schemes is set out below.
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.
Contributions in the year amounted to £2 million (period from 28 August to 31 December 2009 £1 million).
The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings (No. 2) Limited is the principal employer of the Pearl Scheme. 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 2010, undertaken by independent qualified actuaries. Following the UK Government's announcement in the summer of 2010, the inflation index used to derive statutory pension increases (which for the Pearl Scheme applies to deferred pension benefits) has been changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Due to a number of differences between the indices, including both constituents and construction, CPI is expected to be less than RPI over the long term and thus the scheme liabilities have reduced. The reduction in the scheme liabilities has been estimated at £50 million as at 31 December 2010. This has been treated as an assumption change and recognised within actuarial gains in other comprehensive income. 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 Pearl Scheme are set out below.
| 2010 % | 2009 % |
|---|---|
| Rate of general long-term increase in salaries 4.45 |
4.50 |
| Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.45 |
3.50 |
| Rate of increase for deferred pensions (2010: CPI, 2009: RPI) 2.95 |
3.50 |
| Discount rate 5.40 |
5.65 |
| Inflation – RPI 3.45 |
3.50 |
| Inflation – CPI 2.95 |
n/a |
| Expected rate of return on scheme assets 4.80 |
5.10 |
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 a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial valuation as at 30 June 2009, based on the standard tables PMA92 for males and PFA92 for females and based on year of use. This includes medium cohort projections for future mortality improvements, subject to a minimum annual improvement of 1.25% at each age. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.6 years and 31.7 years for male and female members respectively.
A triennial funding valuation of the Pearl Scheme as at 30 June 2009 was completed in June 2010. This showed a deficit on the funding basis as at 30 June 2009 of £755 million compared with the previous triennial funding valuation deficit of £383 million.
The principal employer and the Trustees of the Pearl Scheme entered into an agreement which became effective on 2 September 2009, the principal terms of which provided for the following:
The amounts recognised in the income statement are as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Current service cost | (1) | − |
| Interest cost | (100) | (32) |
| Expected return on scheme assets | 82 | 27 |
| (19) | (5) |
The net actuarial gains recognised in other comprehensive income comprise the following:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Actual return less expected return on scheme assets | 19 | 36 |
| Experience gains arising on scheme liabilities | 70 | 58 |
| Loss due to changes in assumptions underlying scheme liabilities | (51) | (65) |
| 38 | 29 |
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amount to £67 million (2009: £29 million).
The deficit recognised in the statement of financial position is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Fair value of scheme assets | 1,725 | 1,684 |
| Present value of defined benefit obligation | (1,802) | (1,805) |
| (77) | (121) |
Business and strategy
| The actual return on the scheme assets comprises the following: | |
|---|---|
| ----------------------------------------------------------------- | -- |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Expected return on scheme assets | 82 | 27 |
| Actual return less expected return on scheme assets | 19 | 36 |
| 101 | 63 |
The change in the present value of the defined benefit obligation is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 1,805 | − |
| On acquisition of the Pearl businesses | − | 1,791 |
| Current service cost | 1 | − |
| Interest cost | 100 | 32 |
| Actuarial (gains)/losses | (19) | 7 |
| Benefits paid | (85) | (25) |
| At 31 December | 1,802 | 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:
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 1,684 | − |
| On acquisition of the Pearl businesses | − | 1,583 |
| Expected return on scheme assets | 82 | 27 |
| Actual return less expected return on scheme assets | 19 | 36 |
| Contributions by the employer | 25 | 63 |
| Benefits paid | (85) | (25) |
| At 31 December | 1,725 | 1,684 |
The distribution of the scheme assets at the end of the year was as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Equities | 203 | 318 |
| Bonds | 1,228 | 1,215 |
| Properties | 119 | 63 |
| Cash and other | 175 | 88 |
| 1,725 | 1,684 |
Contributions totalling £25 million are expected to be paid into the scheme in 2011 in accordance with the agreement with the Trustee of the Pearl Scheme.
Table of historical information:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Fair value of scheme assets | 1,725 | 1,684 |
| Defined benefit obligation | (1,802) | (1,805) |
| (77) | (121) | |
| Experience gains on scheme assets | 19 | 36 |
| Experience gains on scheme liabilities | 70 | 58 |
The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Contributions in the year amounted to £4 million (period from 28 August 2009 to 31 December 2009 £1 million).
The defined benefit section of the PGL Scheme is a final salary arrangement which is generally closed to new entrants.
The valuation has been based on an assessment of the liabilities of the PGL Scheme as at 31 December 2010, undertaken by independent qualified actuaries. Following the UK Government's announcement in the summer of 2010, the inflation index used to derive statutory pension increases (which for the PGL Scheme applies to deferred pension benefits) has been changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Due to a number of differences between the indices, including both constituents and construction, CPI is expected to be less than RPI over the long term and thus the scheme liabilities have reduced. The reduction in the scheme liabilities has been estimated at £16 million as at 31 December 2010; this has been treated as an assumption change and recognised within actuarial gains in other comprehensive income.
The present values of the defined benefit obligation and the related current service costs have been measured using the projected unit credit method.
A triennial funding valuation of the PGL Scheme as at 30 June 2009 was completed in September 2010. This showed a deficit on the funding basis as at 30 June 2009 of £255 million compares with the previous triennial funding valuation deficit of £69 million. Following discussions with the Trustee of the PGL Scheme it was agreed that new cash contributions to the scheme amounting to £159.5 million would be paid over the period from September 2010 to August 2017.
Together with the outstanding contributions of £28 million due to the scheme as at the end of August 2010 following the previous triennial valuation, this totalled £187 million, of which it was agreed that £50 million would be paid in 2010, £30 million in each of 2011 and 2012, £23 million in 2013, £15 million in each of 2014, 2015 and 2016 and £10 million in 2017. Contributions of £10 million were made to the scheme in the period up to the end of August 2010 and a further £50 million was contributed as described above, giving a total contribution for the year of £60 million.
In accordance with an agreement dated November 2005, certain of the Group's with-profit funds have indemnified the Group's owners in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. Completion of the triennial valuation has resulted in a recovery from the with-profit funds of £37 million, together with interest, in respect of the balance due in relation to the cost of changes in longevity assumptions determined by the previous triennial valuation. Accordingly a contribution in respect of actuarial losses has been made by the with-profit funds of this amount, less tax, resulting in £27 million being recognised in the consolidated statement of comprehensive income.
The principal financial assumptions of the PGL Scheme are set out below.
| 2010 % |
2009 % |
|---|---|
| Rate of general long-term increase in salaries 4.45 |
4.60 |
| Rate of increase for pensions in payment 3.30 |
3.50 |
| Rate of increase for deferred pensions (2010: CPI, 2009: RPI) 2.95 |
3.60 |
| Discount rate 5.40 |
5.70 |
| Inflation – RPI 3.45 |
3.60 |
| Inflation – CPI 2.95 |
n/a |
| Expected rate of return on scheme assets 5.10 |
5.40 |
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.
Additional information
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 60 is 31.2 years and 32.3 years for male and female members respectively. The average life expectancy from retirement for a member currently aged 60 retiring at age 60 is 28.5 years and 30.6 years for male and female members respectively.
The economic value of the PGL Scheme assets as at 31 December 2010 amounted to £1,326 million (2009: £1,192 million) and the economic value of the surplus amounted to £133 million (2009: £62 million). For financial reporting purposes the carrying value of the insurance policies effected by the PGL Scheme with the Group amounting to £74 million (2009: £66 million) has been eliminated on consolidation, resulting in reported assets of the PGL Scheme as at 31 December 2010 of £1,252 million (2009: £1,126 million) and a reported surplus of £59 million (2009: deficit of £4 million).
The amounts recognised in the income statement are as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Current service cost | (4) | (2) |
| Interest cost | (63) | (21) |
| Expected return on scheme assets | 63 | 17 |
| (4) | (6) |
The net actuarial gains recognised in other comprehensive income comprise the following:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Actual return less expected return on scheme assets | 81 | 23 |
| Experience (loss)/gain arising on scheme liabilities | (23) | 18 |
| (Loss)/gain due to changes in assumptions underlying scheme liabilities | (19) | 35 |
| 39 | 76 | |
| Change in provision for tax on the economic surplus available as a refund | (32) | − |
| 7 | 76 |
The cumulative net actuarial gains recognised in other comprehensive income since 28 August 2009 amounted to £83 million (2009: £76 million).
The surplus/(deficit) recognised in the statement of financial position is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Fair value of scheme assets | 1,252 | 1,126 |
| Present value of defined benefit obligation | (1,193) | (1,130) |
| 59 | (4) |
The actual return on the scheme assets comprises the following:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Expected return on scheme assets | 63 | 17 |
| Actual return less expected return on scheme assets | 81 | 23 |
| 144 | 40 |
32.2 PGL Pension Scheme (continued)
The change in the present value of the defined benefit obligation is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 1,130 | − |
| On acquisition of the Pearl businesses | − | 1,176 |
| Current service cost | 4 | 2 |
| Interest cost | 63 | 21 |
| Actuarial losses/(gains) | 42 | (53) |
| Benefits paid | (46) | (16) |
| At 31 December | 1,193 | 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:
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 1,126 | − |
| On acquisition of the Pearl businesses | − | 1,096 |
| Expected return on scheme assets | 63 | 17 |
| Actual return less expected return on scheme assets | 81 | 23 |
| Provision for tax on the economic surplus available as a refund | (32) | − |
| Contributions by the employer | 60 | 6 |
| Benefits paid | (46) | (16) |
| At 31 December | 1,252 | 1,126 |
The distribution of the scheme assets at the end of the year was as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Bonds | 1,128 | 995 |
| Properties | 123 | 110 |
| Cash and other | 33 | 21 |
| Provision for tax on the economic surplus available as a refund | (32) | − |
| 1,252 | 1,126 |
Contributions totalling £30 million are expected to be paid into the scheme in 2011.
Table of historical information:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Fair value of scheme assets | 1,252 | 1,126 |
| Defined benefit obligation | (1,193) | (1,130) |
| Surplus/(deficit) | 59 | (4) |
| Experience gains on scheme assets | 81 | 23 |
| Experience (losses)/gains on scheme liabilities | (23) | 18 |
| 2010 | |||||
|---|---|---|---|---|---|
| Goodwill £m |
Acquired in-force business £m |
Customer relationships £m |
Present value of future profits £m |
Total £m |
|
| Cost or valuation | |||||
| At 1 January | 77 | 2,213 | 445 | 35 | 2,770 |
| Revaluation | − | − | − | 7 | 7 |
| At 31 December | 77 | 2,213 | 445 | 42 | 2,777 |
| Amortisation | |||||
| At 1 January | − | 50 | 7 | − | 57 |
| Charge for the year | − | 147 | 18 | − | 165 |
| At 31 December | − | 197 | 25 | − | 222 |
| Carrying amount | |||||
| At 31 December | 77 | 2,016 | 420 | 42 | 2,555 |
| Amount recoverable after 12 months | 77 | 1,881 | 402 | 42 | 2,402 |
| 2009 | |||||
| Goodwill £m |
Acquired in-force business £m |
Customer relationships £m |
Present value of future profits £m |
Total £m |
|
| Cost or valuation | |||||
| At 1 January | |||||
| On acquisition of the Pearl businesses | 77 | 2,213 | 445 | 31 | 2,766 |
| Revaluation | − | − | − | 4 | 4 |
| At 31 December | 77 | 2,213 | 445 | 35 | 2,770 |
| Amortisation | |||||
| At 1 January | − | − | − | − | − |
| Charge for the year | − | 50 | 7 | − | 57 |
| At 31 December | − | 50 | 7 | − | 57 |
| Carrying amount | |||||
| At 31 December | 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 9.5% (2009: 10.0%).
The carrying amount of goodwill allocated to the Phoenix Life segment is £39 million (2009: £39 million) and to the IGNIS Asset Management segment is £38 million (2009: £38 million).
information
IFRS financial statements
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.
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 9.6% (2009: 11.4%). The institutional mandate IMCs had a value at acquisition of £18 million and a UEL of between 5 and 7 years.
These investment management contract customer relationships have been allocated to the IGNIS Asset Management segment.
The amortisation charge for customer relationships is presented separately in 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 43.5.1.
During the year £7 million (2009: £4 million) of PVFP was credited directly to the consolidated income statement.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Cost or valuation | ||
| At 1 January | 36 | − |
| On acquisition of the Pearl businesses | − | 35 |
| Additions | 3 | 1 |
| At 31 December | 39 | 36 |
| Depreciation | ||
| At 1 January | (2) | − |
| Charge for the year | (3) | (2) |
| At 31 December | (5) | (2) |
| Carrying amount | ||
| At 31 December | 34 | 34 |
The useful lives of plant and equipment have been taken as follows: motor vehicles 3–4 years, computer equipment 3–4 years, furniture and office equipment 5–10 years.
Additional information
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.
| 2010 £m |
2009 £m |
|---|---|
| At 1 January 1,915 |
− |
| On acquisition of the Pearl businesses − |
1,807 |
| Additions 139 |
189 |
| Improvements 12 |
5 |
| Disposals (421) |
(245) |
| Gains on adjustments to fair value 87 |
159 |
| At 31 December 1,732 |
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 £235 million (2009: £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 £2 million (2009: £8 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £2 million (2009: £3 million).
| 2010 £m |
2009 £m |
|
|---|---|---|
| Loans and receivables at amortised cost | 2,293 | 1,081 |
| Financial assets at fair value through profit or loss | ||
| Held for trading – derivatives | 3,197 | 3,540 |
| Designated upon initial recognition | ||
| Equities | 12,460 | 13,151 |
| Fixed and variable rate income securities | 40,899 | 37,658 |
| Collective investment schemes | 7,144 | 6,094 |
| 65,993 | 61,524 | |
| Amount recoverable after 12 months | 39,758 | 39,822 |
The fair value of loans and receivables at amortised cost amounted to £2,320 million (2009: £1,074 million).
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.
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.
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total fair value £m |
|
|---|---|---|---|---|
| Financial assets at fair value | ||||
| Derivatives | 24 | 3,084 | 89 | 3,197 |
| Financial assets designated at fair value through profit or loss upon initial recognition |
||||
| Equities | 11,667 | − | 793 | 12,460 |
| Fixed and variable rate income securities | 34,336 | 5,816 | 747 | 40,899 |
| Collective investment schemes | 5,786 | 1,042 | 316 | 7,144 |
| 51,789 | 6,858 | 1,856 | 60,503 | |
| Total financial assets at fair value | 51,813 | 9,942 | 1,945 | 63,700 |
| Level 1 £m |
Level 2 £m |
Level 3 £m |
Total fair value £m |
|
| Financial liabilities at fair value | ||||
| Derivatives | 1 | 2,419 | 11 | 2,431 |
| Financial liabilities designated at fair value through profit or loss upon initial recognition |
||||
| Investment contract liabilities | − | 8,849 | − | 8,849 |
| Borrowings | − | 234 | − | 234 |
| Net asset value attributable to unit holders | 1,769 | − | 168 | 1,937 |
| 1,769 | 9,083 | 168 | 11,020 | |
| Total financial liabilities at fair value | 1,770 | 11,502 | 179 | 13,451 |
Business and strategy
information
| 2009 | |
|---|---|
| Level 1 £m | Level 2 £m | Level 3 £m | Total fair 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 |
| 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 unit holders | 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 £96 million (2009: £106 million) and £117 million (2009: £110 million) respectively.
The first of these investments 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 £36 million (2009: £18 million) and in the worst case scenario the fair value would decrease by £63 million (2009: £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 £23 million (2009: £19 million) and a reduction in yields of 25bps would increase the value by £25 million (2009: £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.
37.4 Significant transfers of financial instruments between Level 1 and Level 2
| 2010 | ||
|---|---|---|
| From Level 1 to Level 2 £m |
From Level 2 to Level 1 £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 | 96 | 573 |
| Collective investment schemes | − | − |
| 96 | 573 |
There were no transfers of financial liabilities at fair value between Level 1 and Level 2 and between Level 2 and Level 1.
| From Level 1 to Level 2 £m |
From Level 2 to Level 1 £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 unit holders | − | − |
| 9 | − |
The Group continued to see an improvement in the liquidity of the fixed and variable rate securities market throughout 2010 and 2009, which has resulted in a number of securities moving from Level 2 into Level 1. There were however, a number of securities that moved from Level 1 to Level 2 as a result of a downgrading in their credit rating. These securities were mainly in the financial sector with issuers such as banks and insurance companies.
2010
| At 1 January 2010 £m |
Total gains/ (losses) in income statement £m |
Purchases and sales £m |
Transfers (to)/ from Level 1 and Level 2 £m |
At 31 December 2010 £m |
Unrealised gains/(losses) on assets held at end of year £m |
||
|---|---|---|---|---|---|---|---|
| Financial assets | |||||||
| Derivative assets | − | (22) | 111 | − | 89 | (202) | |
| Financial assets designated at fair value through profit or | |||||||
| loss upon initial recognition | |||||||
| Equities | 1,494 | 64 | (766) | 1 | 793 | 19 | |
| Fixed and variable rate income securities | 819 | (43) | 32 | (61) | 747 | 150 | |
| Collective investment schemes | 235 | 97 | 152 | (168) | 316 | 214 | |
| 2,548 | 118 | (582) | (228) | 1,856 | 383 | ||
| Total financial assets | 2,548 | 96 | (471) | (228) | 1,945 | 181 | |
| At 1 January 2010 £m |
Total gains in income statement £m |
Purchases and sales £m |
Transfers from Level 1 and Level 2 £m |
At 31 December 2010 £m |
Unrealised gains on liabilities held at end of year £m |
||
| Financial liabilities | |||||||
| Derivative liabilities | − | (5) | − | 16 | 11 | 11 | |
| Financial liabilities designated at fair value through profit or loss upon initial recognition |
|||||||
| Net asset value attributable to unitholders | 154 | 14 | − | − | 168 | 43 | |
| Total financial liabilities | 154 | 9 | − | 16 | 179 | 54 | |
| 2009 | |||||||
| Unrealised | |||||||
| At 1 January 2009 |
Arising on acquisition of the Pearl businesses £m |
Total gains/ (losses) in income statement £m |
Purchases and sales £m |
Transfers (to)/ from Level 1 and Level 2 £m |
At 31 December 2009 |
gains/(losses) on assets held at end of year £m |
|
| Financial assets designated at fair value through | £m | £m | |||||
| 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 | |
| At 1 January 2009 |
Arising on acquisition of the Pearl businesses |
Total gains in income statement |
Purchases and sales |
Transfers from Level 1 and Level 2 |
At 31 December 2009 |
Unrealised gains on liabilities held at end of year |
|
| Financial liabilities designated at fair value | £m | £m | £m | £m | £m | £m | £m |
| 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.
Level 3 financial instruments are transferred to Level 1 or Level 2 as and when the conditions of each Level are met. During 2010 the Group has seen an increase in observable inputs leading to a reduction in Level 3 financial instruments. information
IFRS financial statements
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 2010 that have not been derecognised amounted to equities of £nil (2009: £398 million) and fixed and variable rate income securities of £9,994 million (2009: £8,214 million).
It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable securities.
Where the Group receives collateral in the form of marketable securities which it is not permitted to sell or re-pledge except in the case of default, such collateral is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as such collateral amounts to £648 million (2009: £5,135 million).
Where the Group receives collateral in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of the collateral received. The amount recognised as a financial asset and a financial liability at 31 December 2010 is £9,222 million (2009: £2,780 million) and £9,339 million (2009: £3,007 million) respectively.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Investment broker balances | 69 | 550 |
| Other debtors | 105 | 231 |
| 174 | 781 | |
| Amount recoverable after 12 months | − | − |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Bank and cash balances | 2,101 | 2,223 |
| Short-term deposits (including demand and time deposits) | 7,087 | 3,858 |
| 9,188 | 6,081 |
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 £8,545 million (2009: £5,551 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.
Business and strategy
2009 £m
2010 £m
41.1 Cash flows from operating activities
41. Cash flows
| Profit for the year before tax | 11 | 91 |
|---|---|---|
| Non-cash movements in profit for the year before tax | ||
| Fair value (gains)/losses on: | ||
| Investment property | (87) | (159) |
| Financial assets | (3,324) | 354 |
| Unrealised gains on: | ||
| Borrowings | 12 | 32 |
| Depreciation of property, plant and equipment | 3 | 2 |
| Amortisation of intangible assets | 165 | 57 |
| Change in present value of future profit | (7) | (4) |
| Change in unallocated surplus | 143 | 175 |
| Change in deposits received from reinsurers | (12) | (25) |
| Interest income on trust account | − | (2) |
| Share-based payment (income)/charge | (3) | 5 |
| Interest expense on borrowings | 269 | 87 |
| Net expected return on pension assets | 18 | 9 |
| Foreign currency exchange gains | (10) | (1) |
| (Increase)/decrease in investment assets | (1,308) | 487 |
| Increase in reinsurance assets | (69) | (160) |
| Increase/(decrease) in insurance contract and investment contract liabilities | 423 | (951) |
| Increase/(decrease) in obligation for repayment of collateral received | 6,054 | (85) |
| Net decrease/(increase) in working capital | 1,114 | (269) |
| Cash generated/(absorbed) by operations | 3,392 | (357) |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Consideration settled in cash | − | − |
| Acquisition expenses | − | 9 |
| 9 | ||
| Cash and cash equivalents of the Pearl businesses | − | (6,155) |
| − | (6,146) |
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 ensures sufficient liquidity to meet creditor obligations and dividend expectations through the combination of cash buffers and cash flows from the Group's operating companies.
The capital policy of each life company is set and monitored by each life company Board. 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, called 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% confidence level, or in other words to be able to withstand 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 ('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 life assurance businesses 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's material with-profit funds at 31 December 2010 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 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. For the purposes of presentation in the capital position statement, an allocation of capital is made from Phoenix Life owners' funds to non-participating and with-profit funds in respect of life assurance subsidiaries of the Phoenix Life owners' 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.
The capital statement and movement analysis that follows presents information about the capital resources for the Group's UK life businesses.
2010 With-profit (see below) £m Nonparticipating £m Phoenix Life owners' funds £m Total Phoenix Life business £m Other activities and consolidation adjustments (note 4) £m Group total £m Owners' funds held outside long-term fund − − 2,194 2,194 (1,329) 865 Owners' funds held in long-term fund − 715 − 715 − 715 Total owners' funds at 31 December 2010 − 715 2,194 2,909 (1,329) 1,580 Adjustments onto a regulatory basis: Unallocated surplus 853 11 − 864 Adjustments to assets (note 1) (93) (319) (422) (834) Adjustments to liabilities (note 2) 3,526 (120) 54 3,460 Other qualifying capital: Subordinated debt (note 3) − − 645 645 Contingent loans 736 216 (772) 180 Allocation of Group capital 52 206 (258) − Total available capital resources at 31 December 2010 5,074 709 1,441 7,224 With-profit
| 2010 | |||||||
|---|---|---|---|---|---|---|---|
| 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 2010 | − | − | − | − | − | − | − |
| Adjustments onto a regulatory basis: | |||||||
| Unallocated surplus | 294 | 153 | 273 | 34 | 62 | 37 | 853 |
| Adjustments to assets (note 1) | (7) | (2) | (11) | − | (1) | (72) | (93) |
| Adjustments to liabilities (note 2) | 761 | 812 | 770 | 261 | 652 | 270 | 3,526 |
| Other qualifying capital: | |||||||
| Subordinated debt (note 3) | − | − | − | − | − | − | − |
| Contingent loans | − | − | − | − | − | 736 | 736 |
| Allocation of Group capital | − | − | − | − | − | 52 | 52 |
| Total available capital resources at | |||||||
| 31 December 2010 | 1,048 | 963 | 1,032 | 295 | 713 | 1,023 | 5,074 |
Note 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.
Note 2: Regulatory adjustments to liabilities primarily reflect differences between the realistic valuation basis for the with-profit business used in calculating owners' funds on an IFRS basis, and the more prudent regulatory valuation basis used to calculate the FSA peak 1 capital resources.
Note 3: Of the £645 million (2009: £720 million) subordinated debt attributed to the Phoenix Life segment of the Group £445 million (2009: £520 million) is internal to the Group, comprising £250 million (2009: £250 million) provided to Pearl and £195 million (2009: £270 million) provided to PALAL. The remaining £200 million (2009: £200 million) is external subordinated debt issued by PLL.
Note 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.
| 2009 | ||||||
|---|---|---|---|---|---|---|
| With-profit (see below) £m |
Non- participating £m |
Phoenix Life owners' funds £m |
Total Phoenix Life business £m |
Other activities and consolidation adjustments (note 4) £m |
Group 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 assets (note 1) | (64) | (298) | (810) | (1,172) | ||
| Adjustments to liabilities (note 2) | 3,237 | (87) | 40 | 3,190 | ||
| Valuation difference between IFRS basis and | ||||||
| regulatory basis | − | 91 | (8) | 83 | ||
| Other qualifying capital: | ||||||
| Subordinated debt (note 3) | 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 | ||
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 (note 1) | (34) | (3) | (11) | − | 1 | (17) | (64) |
| Adjustments to liabilities (note 2) | 604 | 802 | 560 | 265 | 587 | 419 | 3,237 |
| Other qualifying capital: | |||||||
| Subordinated debt (note 3) | 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 |
Note 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.
Note 2: Regulatory adjustments to liabilities primarily reflect differences between the realistic valuation basis for the with-profit business used in calculating owners' funds on an IFRS basis, and the more prudent regulatory valuation basis used to calculate the FSA peak 1 capital resources.
Note 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.
Note 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.
IFRS financial statements
An analysis of the movement in available capital resources for the period 1 January 2010 to 31 December 2010 is shown below:
| With-profit | Phoenix Life | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Pearl WPF £m |
PLL PWP £m |
PLL BWP £m |
SMA WPF £m |
SPL WPF £m |
Other £m |
Non participating £m |
owners' funds £m |
Phoenix Life business £m |
|
| Total available capital resources at 1 January 2010 | 984 | 927 | 803 | 294 | 643 | 819 | 586 | 1,919 | 6,975 |
| Regular surplus | 75 | 64 | (15) | 49 | 8 | 30 | 167 | − | 378 |
| Investment return | 585 | 261 | 375 | 105 | 184 | 379 | (76) | 77 | 1,890 |
| Cost of bonus | (93) | (124) | (85) | (55) | (58) | (66) | − | 39 | (442) |
| Changes in methodology and | |||||||||
| assumptions: | |||||||||
| Longevity | − | − | 4 | 3 | 1 | 1 | 40 | − | 49 |
| Expenses | (6) | 21 | − | (3) | (1) | 10 | 3 | − | 24 |
| Other | (1) | (4) | − | (5) | (3) | (26) | 16 | − | (23) |
| Management actions: | |||||||||
| Dividends paid by Phoenix Life | − | − | − | − | − | − | − | (433) | (433) |
| New business and other factors: | |||||||||
| Intragroup capital movement | (205) | − | − | − | − | 179 | (4) | (225) | (255) |
| Valuation rate of interest | (254) | (140) | (15) | (170) | (118) | (270) | − | − | (967) |
| Adjustment for internal loans in excess | |||||||||
| of counterparty limits | − | − | − | − | − | − | (15) | 64 | 49 |
| Other | (37) | (42) | (35) | 77 | 57 | (33) | (8) | − | (21) |
| Total available capital resources at | |||||||||
| 31 December 2010 | 1,048 | 963 | 1,032 | 295 | 713 | 1,023 | 709 | 1,441 | 7,224 |
An analysis of the movement in available capital resources for the period 1 January 2009 to 31 December 2009 is shown below:
| With-profit | Phoenix Life | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Pearl WPF £m |
PLL PWP £m |
PLL BWP £m |
SMA WPF £m |
SPL WPF £m |
Other £m |
Non participating £m |
owners' funds £m |
Phoenix Life business £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 |
Additional information
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 2010 generally comprise payment of dividends to group entities.
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 and 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 financial soundness risk. Financial soundness risk is a broad risk category encompassing liquidity and funding risk, tax risk and pension 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 43.3 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 are provided in note 43.5 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 financial soundness risk. Each of these are described overleaf, 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.
The impact of non-government fixed and variable rate income securities and, inter alia, the change in market credit spreads during the year is 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.
There is 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 to 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 £223 million (2009: £196 million).
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 £246 million (2009: £216 million).
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 the 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:
| 2010 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 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 | − | − | 1,619 | 13 | 145 | 467 | 44 | 5 | 2,293 |
| Derivatives | − | 2,372 | 630 | − | − | − | 94 | 101 | 3,197 |
| Fixed and variable rate income securities | 25,694 | 4,872 | 5,369 | 3,145 | 343 | 511 | 828 | 137 40,899 | |
| Reinsurers' share of insurance contract liabilities | − | 599 | 2,199 | 20 | − | − | 109 | 12 | 2,939 |
| Cash and cash equivalents | 2,371 | 5,634 | 912 | 81 | − | − | 1 | 189 | 9,188 |
| 28,065 13,477 10,729 | 3,259 | 488 | 978 | 1,076 | 444 58,516 |
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 25,844 6,983 11,838 2,500 514 1,427 1,129 985 51,220
information
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.
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.
| 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 | 2,284 | − | − | − | 4 | 5 | 2,293 |
| Derivatives | 3,096 | − | − | − | − | 101 | 3,197 |
| Fixed and variable rate income securities | 40,762 | − | − | − | − | 137 | 40,899 |
| Reinsurers' share of insurance contract liabilities | 2,927 | − | − | − | − | 12 | 2,939 |
| Reinsurance receivables | 263 | − | − | − | − | − | 263 |
| Prepayments and accrued income | 603 | − | − | − | − | − | 603 |
| Other receivables | 173 | − | − | − | 1 | − | 174 |
| Cash and cash equivalents | 8,999 | − | − | − | − | 189 | 9,188 |
| 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 |
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 statement of consolidated financial position. 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 influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class 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 rate 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.
Additional information
Interest rate 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 rate 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 in equity.
With-profits business and non-participating business within the with-profit funds are exposed to interest rate 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 and variable rate income securities, with the result that sensitivity to changes in interest rates is very low.
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 £103 million (2009: £61 million). 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 £78 million (2009: £89 million).
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 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 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 £22 million (2009: an increase of £5 million).
A 10% increase in equity 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 £21 million (2009: a decrease of £8 million).
A 10% decrease in 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 £52 million (2009: £22 million).
A 10% increase in property prices, with all other variables held constant, would result in an increase in the profit after tax in respect of a full financial year and in equity of £51 million (2009: £21 million).
The Group's principal transactions are carried out in sterling and therefore its exchange risk is limited principally to historic business that was written in the Republic of Ireland, where the assets are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities 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 2010, since unhedged exposure to foreign currency was relatively low.
Financial soundness risk is a broad risk category encompassing liquidity and funding risk, as well as tax risk and pension risk.
Liquidity and funding 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.
Business and strategy
information
information
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 or on demand £m |
1−5 years £m |
Greater than 5 years £m |
No fixed term £m |
Total £m |
|
|---|---|---|---|---|---|
| Liabilities under insurance contracts | 8,103 | 14,556 | 25,882 | 1,938 | 50,479 |
| Investment contracts | 8,849 | − | − | − | 8,849 |
| Borrowings | 190 | 2,751 | 2,153 | 234 | 5,328 |
| Deposits received from reinsurers | 35 | 130 | 492 | 1 | 658 |
| Derivatives | 914 | 343 | 2,801 | − | 4,058 |
| Net asset value attributable to unitholders | 1,937 | − | − | − | 1,937 |
| Obligations for repayment of collateral received | 9,532 | 122 | 506 | − | 10,160 |
| Reinsurance payables | 25 | − | − | − | 25 |
| Payables related to direct insurance contracts | 673 | 40 | − | − | 713 |
| Accruals and deferred income | 205 | 9 | − | − | 214 |
| Other payables | 327 | − | − | − | 327 |
| 1 year or less or on demand £m |
1−5 years £m |
Greater than 5 years £m |
No fixed 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 unitholders | 946 | − | − | − | 946 |
| Obligations for repayment of collateral received | 3,054 | 158 | 412 | 484 | 4,108 |
| Reinsurance payables | 17 | − | − | − | 17 |
| Payables related to direct insurance contracts | 693 | 66 | − | − | 759 |
| Accruals and deferred income | 174 | 3 | − | − | 177 |
| Other payables | 325 | 8 | − | 317 | 650 |
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; |
General insurance – higher than expected number of non-life claims on general insurance policies and occurrence of one or more large claims.
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 Directors 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.
Phoenix has a number of small books of general insurance business across the Group. These have been closed to new business for a number of years and are in run-off.
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.
This general insurance business is managed by an experienced team of specialists who are responsible for all aspects of claims management, reserving and oversight of any activities undertaken by third parties. All such activity is carried out in accordance with the relevant regulations and industry standards.
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.
Business and strategy
Additional information
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 £23 million (2009: £27 million).
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 equity of £24 million (2009: £27 million).
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 £164 million (2009: £91 million).
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 £162 million (2009: £83 million).
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 £61 million (2009: £50 million).
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 £49 million (2009: £41 million).
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.
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 was as follows:
| Increase/ (decrease) in insurance liabilities 2010 £m |
Increase/ (decrease) in insurance liabilities 2009 £m |
|
|---|---|---|
| Change in longevity assumptions | (43) | (73) |
| Change in persistency assumptions | 35 | 94 |
| Change in expenses assumptions | 10 | − |
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:
| 2010 % |
2009 % |
|
|---|---|---|
| Life policies | 2.32 – 3.64 | 2.14 – 3.82 |
| Pension policies | 2.67 – 4.46 | 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 (see deferred annuities in section 43.5.2 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 £1,541 million (2009: £1,469 million) and £20 million (2009: £52 million) respectively.
In common with other life companies in the UK which 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 £329 million (2009: £325 million) and £20 million (2009: £46 million) respectively.
With-profits deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option 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, as shown below, and the ways in which the Group manages those risks.
| Gross | Reinsurance | ||||
|---|---|---|---|---|---|
| Insurance contracts £m |
Investment contracts with DPF £m |
Insurance contracts £m |
Investment contracts with DPF £m |
||
| With-profit funds: | |||||
| Pensions: | |||||
| Deferred annuities – with guarantees | 8,660 | 73 | 469 | − | |
| Deferred annuities – without guarantees | 1,593 | 107 | − | − | |
| Immediate annuities | 4,450 | − | 705 | − | |
| Unitised with-profit | 1,291 | 9,143 | 102 | − | |
| Total pensions | 15,994 | 9,323 | 1,276 | − | |
| Life : |
|||||
| Immediate annuities | 95 | − | 9 | − | |
| Unitised with-profit | 965 | 936 | 38 | − | |
| Life with-profit | 7,209 | − | 2 | − | |
| Total life | 8,269 | 936 | 49 | − | |
| Other | 1,820 | 7 | 67 | − | |
| Non-profit funds: | |||||
| Deferred annuities – with guarantees | 132 | − | 56 | − | |
| Deferred annuities – without guarantees | 1,013 | 6 | 477 | − | |
| Immediate annuities | 8,592 | − | 701 | − | |
| Protection | 636 | − | 282 | − | |
| Unit-linked | 2,078 | 1,435 | 12 | − | |
| Other | 236 | 2 | 19 | − | |
| 38,770 | 11,709 | 2,939 | − |
| Gross | Reinsurance | |||
|---|---|---|---|---|
| Insurance contracts £m |
Investment contracts with DPF £m |
Insurance contracts £m |
Investment contracts with DPF £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 | − |
Performance
Business and strategy
Additional information
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-participating 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 oneninth 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 withprofit 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 Guaranteed Cash Option ('GCO') policies.
During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than originally anticipated. 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. 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 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.
Performance
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.
Operating lease rentals charged within administrative expenses amounted to £7 million (2009: £15 million).
The Group has commitments under non-cancellable operating leases as set out below:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Not later than 1 year | 11 | 11 |
| Later than 1 year and no later than 5 years | 41 | 42 |
| Later than 5 years | 47 | 54 |
The principal operating lease commitments concern office space located at Bothwell Street, Glasgow; St Vincent Street, Glasgow; Juxon House, London; Harcourt Street, London and Cheapside, London.
information
Additional information
| 2010 2009 £m £m |
|
|---|---|
| To subscribe to private equity funds and other unlisted assets 409 |
520 |
| To purchase, construct or develop investment property | 80 108 |
| For repairs, maintenance or enhancements of investment property | 2 3 |
| To acquire property, plant and equipment | − 2 |
The Group has related party transactions with certain of its shareholders, its pension schemes and its key management personnel.
During the year the Group entered into the following transactions with its pension schemes:
| Transactions 2010 £m |
Balances outstanding 2010 £m |
Transactions 2009 £m |
Balances outstanding 2009 £m |
|
|---|---|---|---|---|
| Pearl Scheme | ||||
| Investment management fees | 0.5 | 0.7 | 1.4 | 1.4 |
| Payment of administrative expenses | (3.0) | − | (1.0) | (0.3) |
| (2.5) | 0.7 | 0.4 | 1.1 | |
| PGL Scheme | ||||
| Investment management fees | 2.2 | 0.8 | 0.7 | 0.5 |
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2010 the Pearl Scheme held 1,118,197 units (2009: 1,118,197 units) in the IGNIS Systematic Strategies Fund and 147,928,525 units (2009: 115,477,491 units) in the IGNIS Liquidity Fund. The value of these investments at 31 December 2010 was £168 million (2009: £154 million) and £148 million (2009: £115 million) respectively.
Information on other transactions with the pension schemes is included in note 32.
The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Salary and other short-term benefits | 4.1 | 2.3 |
| Equity compensation plans | 3.1 | 3.6 |
| Termination benefits | 0.5 | − |
Pursuant to the Placing referred to in note 16, Hugh Osmond took up his contractual pre-emption rights and received 310,000 shares at 660 pence per share.
information
Additional information
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. In addition, some Directors have received share-based payments. Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration Report.
The following information is provided in accordance with the UKLA's Listing Rule 11:
Pursuant to the Placing referred to in note 16, TDR Capital Nominees Limited ('TDR') took up its contractual pre-emption rights and received 707,318 shares at 660 pence per share. The subscription by TDR and Hugh Osmond represented an aggregate allocation of approximately 20% of the Placing.
On 29 November 2010, Pearl Assurance Limited and London Life Limited invested a total of €7,774,476 in Sant Topco Holdings II S.a.r.l ('Topco') through a subscription of 3,110 'B' ordinary shares with a par value of € 25. This brings the Group's direct investment in Topco and its ultimate holding company to approximately €166 million. As shareholders in Topco, TDR, Hugh Osmond and Edward Hawkes also subscribed for 'B' ordinary shares alongside Pearl Assurance Limited and London Life Limited.
TDR, Hugh Osmond and Edward Hawkes are related parties for the purposes of the UKLA's Listing Rules.
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') had challenged the tax treatment of these transfers in the year ended 31 December 2004 and litigation was anticipated in 2010. During the year, HMRC confirmed that they will not pursue litigation.
London Life Limited has provided information to the FSA on its categorisation 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 £27 million (2009: £54 million) exists if London Life Limited were required to transfer this working capital back to policyholder funds.
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 Limited | UK | 'A' ordinary shares of £0.05 |
| 'B' ordinary shares of £1 | ||
| PA (GI) Limited (general insurance company) | UK | Ordinary shares of £0.01 |
| 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 (investment | UK | Ordinary shares of £1 |
| management company) | ||
| IGNIS Fund Managers Limited (unit trust management) | UK | Ordinary shares of £1 |
| IGNIS Investment Services Limited (investment | UK | Ordinary shares of £1 |
| management company) | ||
| Impala Holdings Limited (holding company) | UK | 'A' ordinary shares of £1, |
| 'B' ordinary shares of £1 'C' 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 |
| 'B' ordinary shares of £1 and | ||
| Preference 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 and |
| Preference shares of £1 | ||
| PGH (LC2) Limited (finance company) | UK | Ordinary shares of £1 and |
| Preference shares of £1 | ||
| PGH (MC1) Limited (finance company) | UK | Ordinary shares of £1 and |
| Preference shares of £1 | ||
| PGH (MC2) Limited (finance company) | UK | Ordinary shares of £1 and |
| Preference shares of £1 | ||
| PGH (TC1) Limited (holding company) | UK | 'A' ordinary shares of £1 and |
| Preference shares of £1 | ||
| PGH (TC2) Limited (holding company) | UK | 'A' ordinary shares of £1 and |
| Preference shares of £1 |
| Country of incorporation and | Class of shares held | |
|---|---|---|
| principal place of operation | (wholly-owned unless otherwise indicated) | |
| Pearl Group Holdings (No. 1) Limited (finance company) | UK | Ordinary shares of £0.05 |
| 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 |
| 66% of ordinary shares of | ||
| UK Commercial Property Trust Limited (property fund) | Guernsey | £0.25 |
The information disclosed above is only in respect of those undertakings which materially 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.
With effect from 1 January 2011, all of the long-term business and some of the shareholders' funds of Phoenix & London Assurance Limited were transferred to Phoenix Life Limited for £nil consideration in accordance with the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 approved by the High Court on 11 February 2011. Both of these companies are wholly owned subsidiaries of the Group and therefore there is no financial impact from an IFRS perspective for the Group.
On 1 March 2011, the European Court of Justice ruled that insurance companies will, with effect from 21 December 2012, no longer be allowed to use gender as a basis for calculating premiums. At this time, the precise impact of this judgement is uncertain, and management is currently examining the implications. Consequently, it is not yet possible to determine with any certainty what the effect of this judgement may be on the Group.
On 21 March 2011, the Group successfully completed the restructuring of a £1.2 billion portfolio of corporate loans leading to a reduction in asset volatility. The restructuring has involved the repayment of a number of borrowings (see note 22). The restructuring has minimal financial impact from an IFRS perspective.
On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies', outlining changes to the taxation of UK insurance companies with effect from 2013. The timing of the announcement and the complexity of the proposed changes means that it has not been possible to estimate their potential future impact on the deferred tax balances shown in these accounts.
On 28 March 2011 the Board declared a dividend of £0.21 per share (2009: €0.17 per share) for the year ended 31 December 2010. The cost of this dividend has not been recognised as a liability in the financial statements for 2010 and will be charged to the statement of changes in equity in 2011.
R Sandler C Bannister J Yates 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
28 March 2011
Overview
Despite continuing volatility in market conditions, we achieved a 15 percent growth in MCEV, demonstrating the resilience of Phoenix Life and the Group's ability to enhance shareholder value through innovative management actions.
| 172 | Statement of Directors' responsibilities |
|---|---|
| 173 | Independent Auditor's report |
| 174 | Summarised consolidated income statement – Group MCEV basis |
| 174 | MCEV earnings per ordinary share |
| 175 | Statement of consolidated comprehensive income – Group MCEV basis |
| 175 | Reconciliation of movement in equity – Group MCEV basis |
| 176 | Group MCEV analysis of earnings |
| 177 | Reconciliation of Group IFRS equity to MCEV Net Worth |
| 178 | Notes to the MCEV financial statements |
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:
Clive Bannister Jonathan Yates St Helier 28 March 2011
Group Chief Executive Group Finance Director
We have audited the Consolidated Phoenix Group MCEV ('Phoenix Group MCEV') supplementary information on pages 174 to 187 for the year ended 31 December 2010 which comprises the Summarised consolidated income statement – Phoenix Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income – Phoenix Group MCEV basis, Reconciliation of movement in equity – Phoenix Group MCEV basis, Phoenix Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to Phoenix Group MCEV net worth and related notes. The Phoenix Group MCEV supplementary information has been prepared in accordance with the basis of preparation set out on pages 178 to 181.
Ernst & Young Accountants LLP have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31 December 2010.
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 an auditor's 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 explained more fully in the Statement of Directors' responsibilities set out on page 172, the Company's Directors are responsible for the preparation of the Phoenix Group MCEV supplementary information in accordance with the basis of preparation set out on pages 178 to 181. Our responsibility is to audit and express an opinion on the Phoenix Group MCEV supplementary information in accordance with the terms of our engagement letter and having regard to International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the Phoenix Group MCEV supplementary information sufficient to give reasonable assurance that it is free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Phoenix Group MCEV supplementary information.
In our opinion the Phoenix Group MCEV supplementary information, for the year ended 31 December 2010, has been properly prepared, in all material respects, in accordance with the basis of preparation set out on pages 178 to 181.
Ernst & Young LLP London 28 March 2011
W
| 2010 £m |
Pro forma 2009 £m |
|
|---|---|---|
| Life MCEV operating earnings | 758 | 380 |
| Management services operating profit | 20 | 14 |
| Ignis Asset Management operating profit | 46 | 34 |
| Group costs | (70) | (54) |
| Group MCEV operating earnings before tax1 | 754 | 374 |
| Economic variances on covered business | 101 | 701 |
| Economic variances on non-covered business | (38) | (245) |
| Other non-operating variances on covered business | (54) | 9 |
| Non-recurring items on non-covered business | (75) | (87) |
| Gain on debt refinancing | – | 491 |
| Finance costs attributable to owners | (168) | (390) |
| Group MCEV earnings before tax | 520 | 853 |
| Tax on operating earnings | (211) | (105) |
| Tax on non-operating earnings | (54) | (197) |
| Total tax | (265) | (302) |
| Group MCEV earnings after tax | 255 | 551 |
1 The Group has moved to calculating the expected contribution on existing business using longer term expectations of investment returns. The pro forma 'Group MCEV operating earnings before tax' and 'Economic variances on covered business' before tax would have been £538 million and £537 million respectively for the year ended 31 December 2009 if the expected contribution had been calculated using longer term rates of return.
for the year ended 31 December 2010
| 2010 | Pro forma 2009 |
|
|---|---|---|
| Group MCEV operating earnings after tax | ||
| Basic1 | 363.2p | 291.5p |
| Diluted2 | 363.2p | 254.4p |
| Group MCEV earnings after tax | ||
| Basic1 | 170.6p | 597.2p |
| Diluted2 | 170.6p | 521.1p |
1 Based on 149 million shares (2009: 92 million) as set out in note 15 of the IFRS consolidated financial statements.
2 Based on 149 million shares (2009: 106 million), allowing for warrants in issue as set out in note 15 of the IFRS consolidated financial statements.
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 2010
| 2010 £m |
Pro forma 2009 £m |
|
|---|---|---|
| Group MCEV earnings for the year after tax | 255 | 551 |
| Other comprehensive income | ||
| Actuarial gains/(losses) on defined benefit pension scheme | 27 | (14) |
| Exchange differences on translating foreign operations | – | (44) |
| 27 | (58) | |
| Total comprehensive income for the year | 282 | 493 |
| 2010 £m |
Pro forma 2009 £m |
|
|---|---|---|
| Group MCEV equity at 1 January | 1,827 | 1,044 |
| Total comprehensive income for the year | 282 | 493 |
| Issue of share capital | 33 | 275 |
| Conversion of warrants into ordinary shares | 7 | 51 |
| Redemption of shares | – | (41) |
| Movement in equity for equity-settled share-based payments | (2) | 5 |
| Dividends paid on ordinary shares | (54) | – |
| Shares issued in lieu of dividends | 11 | – |
| Group MCEV equity at 31 December | 2,104 | 1,827 |
BUSINESS AND STRATEGY
for the year ended 31 December 2010
| Non-covered business | |||||
|---|---|---|---|---|---|
| Covered business MCEV £m |
Management services IFRS £m |
Asset Management IFRS £m |
Other Group companies¹ IFRS £m |
Group MCEV £m |
|
| Group MCEV at 1 January 2010 | 4,731 | 56 | 39 | (2,999) | 1,827 |
| Operating MCEV earnings (after tax) | 546 | 14 | 33 | (50) | 543 |
| Non-operating MCEV earnings (after tax) | 34 | (54) | – | (268) | (288) |
| Total MCEV earnings | 580 | (40) | 33 | (318) | 255 |
| Other movements | – | – | – | 27 | 27 |
| Capital and dividend flows – internal2 | (794) | 64 | (18) | 748 | – |
| Capital and dividend flows – external | – | – | – | (5) | (5) |
| Closing value at 31 December 2010 | 4,517 | 80 | 54 | (2,547) | 2,104 |
1 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.
2 Includes a re-allocation of a £250 million loan asset from Covered business to Other Group companies. This does not affect the closing Group MCEV or MCEV earnings.
| Non-covered business | |||||
|---|---|---|---|---|---|
| Covered business MCEV £m |
Management services IFRS £m |
Asset Management IFRS £m |
Other Group companies¹ 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) | 273 | 10 | 24 | (38) | 269 |
| Non- operating MCEV earnings (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.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Group net assets attributable to owners of the parent as reported under IFRS | 1,580 | 1,412 |
| Goodwill and other intangibles in accordance with IFRS removed (net of tax) | (391) | (413) |
| Value of in-force business in accordance with IFRS removed (net of tax) | (1,345) | (1,419) |
| Adjustments to IFRS reserving | (138) | (98) |
| Tax adjustments | (90) | (99) |
| Revalue listed debt to market value | 94 | 235 |
| Eliminate value of contingent loan asset1 | (276) | (194) |
| Fair value adjustments2 | 5 | (40) |
| Eliminate pension scheme surplus3 (net of tax) |
(112) | (45) |
| Other adjustments | 30 | (9) |
| MCEV net worth attributable to owners of the parent | (643) | (670) |
| MCEV value of in-force business included (net of tax) as set out in note 2 | 2,747 | 2,497 |
| Closing Group MCEV | 2,104 | 1,827 |
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 Pension scheme net of tax, as described in note 32 to the IFRS consolidated financial statements.
The supplementary information on pages 174 to 187 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, the MCEV supplementary information treats the Pearl businesses as having been acquired on 1 January 2009. For this reason the results for the year ended 31 December 2009 are referred to as pro forma.
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:
On 21 March 2011 the restructuring of a £1.2 billion portfolio of corporate loans was completed. The December MCEV includes a benefit of £139 million from this restructuring primarily from the additional liquidity premium expected to be earned following the restructuring.
With effect from 1 January 2011, all of the long-term business and some of the shareholders' funds of Phoenix & London Assurance Limited were transferred to Phoenix Life Limited for £nil consideration in accordance with the terms of a scheme under Part VII of the Financial Services and Markets Act 2000 approved by the High Court on 11 February 2011. The 2010 MCEV includes a £19 million benefit from the transfer.
A gradual reduction in the UK corporation tax rate from 28% to 24% over the next 4 years was announced in the Emergency Budget of 22 June 2010 with a further 1% reduction being announced in the Budget of 23 March 2011. The Finance (No. 2) Act 2010 included the first of the 1% rate reductions with effect from April 2011, with subsequent reductions to be dealt with by future legislation. The 2010 MCEV includes the impact of the tax rate being reduced to 27%. The impact of the further 4% reduction of rate is not expected to be material.
On 1 March 2011, the European Court of Justice ruled that insurance companies will, with effect from 21 December 2012, no longer be allowed to use gender as a basis for calculating premiums. At this time, the precise impact of this judgement is uncertain, and management is currently examining the implications. Consequently, it is not yet possible to determine with any certainty what the effect of this judgement may be on the Group.
On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies', outlining changes to the taxation of UK insurance companies with effect from 2013. The timing of the announcement and the complexity of the proposed changes means that it has not been possible to estimate their potential future impact on the Group MCEV.
The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management and the management service companies.
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.
The key components of MCEV are net worth plus the value of in-force covered 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 or 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.
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):
The present value of future profits 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.
Cost of capital 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.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Pillar1 and Pillar 2 capital requirements, plus the capital required under the Group's capital management policy.
This equates to 119% (2009: 125%) of the minimum regulatory capital requirement.
Solvency II will introduce a new capital regime for insurers from the end of 2012. These disclosures do not take account of the impact of the change in regime as this is still under development.
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 CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO Forum principles and guidance does not anticipate further risk management actions and therefore does not provide a fair reflection of the Group's ongoing risk.
However, the CNHR 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 CNHR would increase the TVFOGs by £64 million (2009: £93 million).
For other business the cost would be £137 million (2009: £141 million). This equates to an equivalent average cost of capital charge of 1.2% (2009: 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 limited recourse 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 nonprofit 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 companies' 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.
| 2010 | 2009 | |
|---|---|---|
| £m | £m | |
| Net worth | 1,770 | 2,234 |
| PVFP | 3,022 | 2,864 |
| TVFOG | (113) | (97) |
| COC | (162) | (270) |
| Total VIF | 2,747 | 2,497 |
| 4,517 | 4,731 |
The net worth of covered business of £1,770 million at 31 December 2010 (2009: £2,234 million) consists of £670 million of free surplus in excess of required capital (2009: £408 million). This does not include the IFRS net assets of management services of £80 million (2009: £56 million) as shown in the free surplus reconciliation for Phoenix Life on page 32.
| Net worth £m |
VIF £m |
Total Life MCEV £m |
|
|---|---|---|---|
| Life MCEV at 1 January 2010 | 2,234 | 2,497 | 4,731 |
| New business value | 16 | 3 | 19 |
| Expected existing business contribution (reference rate)1 | 102 | 122 | 224 |
| Expected existing business contribution (in excess of reference rate)2 | 43 | 39 | 82 |
| Transfer from VIF to net worth | 145 | (145) | – |
| Experience variances | 35 | 229 | 264 |
| Assumption changes | 53 | (91) | (38) |
| Other operating variances | (28) | 23 | (5) |
| Life MCEV operating earnings | 366 | 180 | 546 |
| Economic variances | (94) | 167 | 73 |
| Other non-operating variances | 58 | (97) | (39) |
| Total Life MCEV earnings | 330 | 250 | 580 |
| Capital and dividend flows | (794) | – | (794) |
| Life MCEV at 31 December 2010 | 1,770 | 2,747 | 4,517 |
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long term risk free rate.
2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk free rate arising from long term risk premiums on equities, property and corporate bonds.
| Net worth £m |
VIF £m |
Total Life MCEV £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 to net worth | 181 | (181) | – |
| Experience variances | 51 | 11 | 62 |
| Assumption changes | 165 | (92) | 73 |
| Other operating variances | (14) | 35 | 21 |
| Life MCEV operating earnings | 443 | (170) | 273 |
| Economic variances | 66 | 438 | 504 |
| Other non-operating variances | 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 |
BUSINESS AND STRATEGY
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.
| Premium £m |
MCEV £m |
MCEV/Premium. % |
|
|---|---|---|---|
| Year ended 31 December 2010 | 388 | 19 | 5% |
| Year ended 31 December 2009 (pro forma) | 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 | ||||||
|---|---|---|---|---|---|---|
| Present value of future profits (PVFP) | 1-5 £m |
6-10 £m |
11-15 £m |
16-20 £m |
20+ £m |
Total |
| 31 December 2010 | 1,147 | 848 | 488 | 271 | 268 | 3,022 |
| 31 December 2009 | 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:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Term | Gilt Yield +10 bps | Swap Yield | Gilt Yield +10 bps | Swap Yield |
| 1 year | 0.73% | 0.88% | 0.97% | 1.02% |
| 5 years | 2.51% | 2.69% | 3.13% | 3.49% |
| 10 years | 3.79% | 3.70% | 4.35% | 4.27% |
| 15 years | 4.37% | 4.08% | 4.80% | 4.55% |
| 20 years | 4.58% | 4.17% | 4.86% | 4.55% |
The swaps rates above are only applicable to sensitivity (16) as disclosed in note 7.
INFORMATION
ADDITIONAL INFORMATION
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 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. The additional yield above risk-free rates implied by the calculated liquidity premium is as follows:
| 2010 | 2009 | |
|---|---|---|
| Additional yield over risk-free rates | 0.48% | 0.30% |
For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index ('RPI') as at 31 December 2010 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 2010 (2009: RPI + 100 basis points).
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 2010. 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 10 basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.
| Option term (years) | ||||||
|---|---|---|---|---|---|---|
| Interest rate volatility | 5 | 10 | 15 | 20 | 25 | 30 |
| 2010 Swap term (years) | ||||||
| 5 | 17.5% | 13.3% | 13.6% | 13.9% | 14.7% | 15.1% |
| 10 | 15.8% | 13.5% | 13.6% | 13.9% | 14.5% | 14.3% |
| 20 | 15.2% | 13.2% | 13.2% | 13.0% | 13.0% | 12.6% |
| 30 | 14.6% | 12.6% | 12.2% | 11.7% | 11.5% | 11.2% |
| Option term (years) | ||||||
|---|---|---|---|---|---|---|
| Interest rate volatility | 5 | 10 | 15 | 20 | 25 | 30 |
| 2009 Swap term (years) | ||||||
| 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% |
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) | ||||||
|---|---|---|---|---|---|---|
| Equity implied volatility (ATM) | 5 | 10 | 15 | 20 | 25 | 30 |
| 2010 | 24.3% | 26.1% | 26.4% | 26.7% | 26.8% | 27.0% |
| 2009 | 25.3% | 26.6% | 27.3% | 27.5% | 27.6% | 27.7% |
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 2010 is 15% (2009: 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.
The Group uses normalised investment returns in calculating the expected existing business contribution. In 2009 the expected contribution was calculated using a one-year gilt forward rate plus the Group's long-term expectations of excess investment returns on equities, properties and bonds. From 2010, the Group considers that an average return over the remaining term of our in-force business is more appropriate than using a short-term rate and is more consistent with the Group's expectation of longer term rates of return. Therefore, the Group has moved to calculating the expected contribution on existing business using a 15-year gilt rate at the beginning of the reporting period plus 10 basis points and long-term expectations of excess investment returns.
The table below sets outs the asset risk premiums used:
| 2010 | 2009 | |
|---|---|---|
| Equities | 3.0% | 2.5% |
| Property | 2.0% | 2.0% |
| Gilts | 0.0% | 0.0% |
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit risk.
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 2010 includes Perpetual Reset Capital Securities with a face value of £425 million (2009: £500 million) and subordinated debt with a face value of £200 million (2009: £200 million) in relation to Phoenix Life Limited. 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.
| 2010 | 2009 | |||
|---|---|---|---|---|
| Face value (including accrued interest) £m |
Market value £m | Face value (including accrued interest) £m |
Market value £m | |
| Listed debt and non-controlling interests | ||||
| Perpetual Reset Capital Securities | 439 | 304 | 540 | 264 |
| Phoenix Life Limited subordinated debt | 216 | 170 | 211 | 156 |
| Unlisted debt has been included at face value. | ||||
| 2010 Face value | 2009 Face value | |||
| Unlisted debt | ||||
| Pearl and Impala facilities | 2,639 | 2,760 | ||
| Royal London PIK notes and facility | 106 | 102 |
The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2010:
| 2010 Life MCEV £m |
|
|---|---|
| (1) Base | 4,517 |
| (2) 1% decrease in risk-free rates | 183 |
| (3) 1% increase in risk-free rates | (167) |
| (4) 10% decrease in equity market values | (105) |
| (5) 10% increase in equity market values | 102 |
| (6) 10% decrease in property market values | (77) |
| (7) 10% increase in property market values | 76 |
| (8) 100 bps increase in credit spreads1 | (267) |
| (9) 100 bps decrease in credit spreads | 250 |
| (10) 25% increase in equity/property implied volatilities | (35) |
| (11) 25% increase in swaption implied volatilities | (23) |
| (12) 25% decrease in lapse rates and paid-up rates | (21) |
| (13) 5% decrease in annuitant mortality | (166) |
| (14) 5% decrease in non-annuitant mortality | 35 |
| (15) Required capital equal to the minimum regulatory capital² | 31 |
| (16) Swap curve as reference rate, retaining appropriate liquidity premiums | (272) |
1 44 bps is assumed to relate to default risk.
2 Minimum regulatory capital is defined as the greater of Pillar 1 and Pillar 2 capital requirements without any allowance for the Group's capital management policy.
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.
CORPORATE RESPONSIBILITY
PERFORMANCE
OVERVIE W
BUSINESS AND STRATEGY
188 Phoenix Group Holdings Annual Report and Accounts 2010
Our Annual General Meeting will be held on 13 May 2011 at 1pm.
The voting results for our 2011 AGM, including proxy votes withheld will be available on our website shortly after the meeting at the following address: www.thephoenixgroup.com
| Analysis of shareholders | No. of shareholders | % | No. of shares | % |
|---|---|---|---|---|
| Individual | 41 | 14 | 10,159,186 | 6 |
| Banks and nominee companies | 207 | 73 100,803,370 | 59 | |
| Insurance companies | 6 | 2 | 9,678,113 | 6 |
| Other entities | 30 | 11 | 50,814,941 | 29 |
| Total | 284 | 100 | 171,455,610 | 100 |
| Range of shareholders | No. of shareholders | % | No. of shares | % |
| 1–1,000 | 37 | 13.03 | 14,173 | 0.01 |
| 1,001–5,000 | 33 | 11.62 | 87,953 | 0.05 |
| 5,001–10,000 | 22 | 7.75 | 159,431 | 0.09 |
| 10,001–250,000 | 116 | 40.84 | 8,259,026 | 4.82 |
| 250,001–500,000 | 27 | 9.51 | 9,869,480 | 5.76 |
| 500,001 and above | 49 | 17.25 153,065,547 | 89.27 | |
| Total | 284 | 100 | 171,455,610 | 100 |
Addition
inform
ation
informatio n
al
Our Registrar, Computershare, maintains the Company's Register of Members. Shareholders may request a hard copy of this Annual Report from our registrar and if you have any further queries in respect of your shareholding, please contact them directly using the contact details set out below.
Computershare Investor Services (Jersey) Limited PO Box 329 Queensway House Hilgrove Street St Helier Jersey JE4 9XY
Shareholder helpline number +44 (0) 870 707 4040 Fax number +44 (0) 870 873 5851 Shareholder helpline e-mail address [email protected]
Shareholders may find it convenient to have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility please call Computershare and request a 'Dividend Mandate' form.
The Company will be offering a scrip dividend alternative in relation to the recommended final dividend. Shareholders will be sent an information booklet which will detail the terms of the scrip dividend alternative on or around 8 April 2011. The information booklet will also be made available on the Group's website, www.thephoenixgroup.com
The information booklet will detail how shareholders may elect to take up a scrip dividend alternative. Such elections must be received by the Company's Registrars by 5pm on 26 April 2011.
Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas-based 'brokers' who target UK shareholders, offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as 'boiler rooms'.
They can be very persistent and extremely persuasive, and a 2006 survey by the Financial Services Authority has reported that the average amount lost by investors is around £20,000. It is not just the novice investor that has been duped in this way; many victims had been successfully investing for several years. Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports into the Company.
If you receive any unsolicited investment advice, make sure you get the correct name of the person and organisation. Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register/, report the matter to the FSA either by calling 0300 500 5000 or visiting www.moneymadeclear.fsa.gov.uk and if the calls persist, hang up.
If you deal with an unauthorised firm, you would not be eligible to receive payment under the Financial Services Compensation Scheme. The FSA can be contacted by completing an online form at http://www.fsa.gov.uk/pages/doing/ regulated/law/alerts/overseas.html or, if you do not have access to the internet, on 0845 606 1234.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
More detailed information on this or similar activity can be found on the FSA website http://www.fsa.gov.uk/consumer/
You can access the current share price of Phoenix Group Holdings at www.thephoenixgroup.com
| Annual General Meeting | 13 May 2011 |
|---|---|
| Announcement of first quarter interim management statement | 16 May 2011 |
| Announcement of unaudited six months' interim results | 25 August 2011 |
| Announcement of third quarter interim management statement | 8 November 2011 |
| Ordinary shares – 2010 final dividend | |
| Ex-dividend date | 6 April 2011 |
| Scrip calculation period | 6–12 April 2011 |
| Scrip mandate forms issued | 8 April 2011 |
| Record date | 8 April 2011 |
| Scrip election date | 26 April 2011 |
| Payment date for the recommended final dividend | 17 May 2011 |
The 2010 Annual Report and Accounts contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking. Forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to:
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 2010 Annual Report and Accounts. The Group undertakes no obligation to update any of the forward-looking statements contained within the 2010 Annual Report and Accounts or any other forward-looking statements it may make.
The 2010 Annual Report and Accounts 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 2010 Annual Report and Accounts should be construed as a profit forecast.
| 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 – The process through which the deferred coupon on certain securities is settled. |
| 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 – This represents all assets actively managed or administered by the asset management operations of the Group, excluding the cash collateral managed through stocklending arrangements. |
| 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. |
| 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 no longer accepts 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 version of the Code which applied to the Company in 2010 was 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 PFVP or TVFOG. These can include both financial risks and non-financial risks such as mortality, persistency and expense risk. |
Business and strategy
| 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 contractually 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. |
| EIOPA | European Insurers and Occupational Pensions Authority – the Committee is composed of high-level representatives from the insurance and occupational pensions supervisory authorities of European Union member states and is currently consulting with the industry on the technical requirements of Solvency II. |
| 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 governance and reporting. |
| 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 through which exercise is accomplished by a payment in cash, rather than by delivering the underlying security. |
| GCR | Group Capital Resources – In accordance with the UK regulatory regime for insurance firms this is the aggregate of the individual capital resources for each of the regulated related undertakings less the book value of investments by the Group in those capital resources. |
| GCRR | Group Capital Resource Requirement – In accordance with the UK's regulatory regime for insurers it is the sum of the individual capital resource requirements for the insurer and each of its regulated undertakings. |
| Gearing | Net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and the PVFP of IGNIS. |
| HMR C |
Her Majesty's Revenue and Customs. |
| ICA | Individual Capital Assessment – A firm's assessment of the adequacy of its capital required to ensure that assets exceed liabilities 99.5%ofthe time over a 1-year period. |
| IFRS | International Financial Reporting Standards – Accounting standards, Interpretations and the Framework adopted by the International Accounting Standards Board. |
| IMC | Investment Management Contract – A contract between an investor and an investment manager. |
| IGD | Insurance Groups Directive – The European Directive setting out the current capital adequacy regime for insurance groups. |
| IMMF A |
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 – The interest rate that banks charge each other for loans of varying short-term maturities. |
| LSE | London Stock Exchange. |
| LTICR | Long-Term Insurance Capital Requirement – 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 incentivise 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 note 1 of the MCEV supplementary information. |
| MSA | Management Services Agreement – A contract that exists between either Phoenix Life and management services or between management services and their outsourced services providers. |
| Net shareholder debt |
Shareholder debt (including hybrid debt) less Holding Company cash and cash equivalents. |
| 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 its investment criteria and fund size. |
| Pearl businesses | PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited, PGH (TC2) Limited and Opal Reassurance Limited, together with their subsidiaries, being the five companies acquired by Phoenix Group Holdings on 2 September 2009. |
| PGH EBT | Phoenix Group Holdings Employee Benefit Trust. |
| 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 premium listings replaced primary listings 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 the London Stock Exchange. |
| PVFP | Present Value of Future Profits – The present value of profits attributable to shareholders arising from the in-force business. |
| RCR | Risk Capital Requirement – Additional amounts of capital required to be held for regulatory purposes as a result of two stress tests. |
| 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. |
| TCF | Treating Customers Fairly – A central FSA principle that aims to ensure an efficient and effective market and thereby help policyholders achieve a fair deal. |
| 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 future economic benefits are expected to be derived from an asset. |
| 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, and which 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 Cost of Required Capital (COC). |
| WPICC | With-profit insurance capital component. The WPICC is the amount by which the regulatory surplus exceeds the realistic surplus. |
To view this report online visit www.thephoenixgroup.com
This annual report is printed on Revive 50:50 white silk. This paper is produced from 50% recycled fibre and 50% virgin fibre. 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 specifies a process for continuous environmental improvement and both are FSC certified. If you have finished 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.
Design and Production Radley Yeldar
Photography Mike Ellis
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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