TIDMPHNX TIDMPHNW
RNS Number : 9244Z
Phoenix Group Holdings
23 March 2012
23 March 2012
PHOENIX GROUP REPORTS STRONG 2011 FINANCIAL RESULTS, WITH
OPERATING CASHFLOWS OF GBP810 MILLION
Phoenix Group, the UK's largest specialist closed life fund
consolidator, today announces full year results for the year ending
31 December 2011.
Financial Highlights
-- Operating companies' cash generation at GBP810 million (2010:
GBP734m), above the mid-point of the GBP750 - GBP850 million target
range
-- Resilient Market Consistent Embedded Value ('MCEV') of GBP2,118 million (2010: GBP2,104m)
-- GBP165 million of incremental MCEV delivered, ahead of GBP100 million average annual target
-- Strong Group IFRS operating profit of GBP387 million (2010: GBP373m)
-- Group assets under management of GBP72.1 billion (2010: GBP69.6bn)
-- Gearing reduced to 46%, ahead of 50% target (2010: 52%)
-- 21p final dividend per share recommended, total 42p for 2011 (2010: 42p)
Operational Highlights
-- Life company structure further streamlined, enabling the
Group to benefit from increased efficiencies
-- Over 2 million live policies now transferred onto new BaNCS administration system
-- Investment and distribution teams strengthened at Ignis,
leading to above benchmark investment performance and an increase
in net new third party assets to GBP1.7 billion
Financial Targets
-- GBP500-600 million target for 2012 operating companies' cash generation
-- Operating companies' cash generation target for 2011-2016 of GBP3.2 billion
-- Incremental MCEV target of GBP100 million p.a. on average between 2011-2014
-- Gearing target of 43% or below by the end of 2012
Commenting on the results, Group CEO, Clive Bannister said:
"Phoenix has continued to make considerable progress in 2011,
despite the volatile market conditions. We have achieved or
exceeded all of our 2011 financial targets including cash
generation, gearing and MCEV enhancement, demonstrating the
resilience of the Phoenix business model.
"We have a clear strategy to harvest value for our shareholders
through the release of the stable long term cashflows inherent
within the business. The generation of GBP810 million of cash,
above the mid-point of our target range, and our improved group
capital position reinforces our confidence in our ability to
progress discussions with our lenders, as we look to align the
maturity of our debt to the profile of our long term
cashflows."
Presentation
There will be a presentation for analysts and investors today at
9.30 am (GMT) at:
Deutsche Bank, Winchester House, 1 Great Winchester Street,
London, EC2N 2DB.
A link to a live webcast of the presentation, with the facility
to raise questions, and a copy of the presentation will be
available at www.thephoenixgroup.com
A replay of the presentation will also be available through the
website.
Participants may also dial in as follows:
UK 020 3059 8125
International +44 (0) 20 3059 8125
Participant password: Phoenix
Enquiries
Investors
Katherine Jones
Head of Investor Relations, Phoenix
Group +44 (0)20 7489 4879
Media
Neil Bennett, Maitland
Peter Ogden, Maitland +44 (0)20 7379 5151
Notes
1. Phoenix Group is the UK's largest specialist consolidator of
closed life funds with approximately six million customers and over
GBP72 billion of assets under management.
2. Gearing is calculated as net shareholder debt as a percentage
of the sum of Group MCEV, net shareholder debt and the present
value of future profits of Ignis. Net shareholder debt is
shareholder debt (including hybrid debt) less Holding Company cash
and cash equivalents.
3. 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, bank
interest and other items.
4. The recommended final dividend of 21p per share is expected
to be paid on 8 May 2012, subject to compliance with the processes
set out in the Group's main credit facilities and shareholder
approval at Phoenix Group Holdings' AGM. The ordinary shares will
be quoted ex-dividend on the London Stock Exchange as of 4 April
2012. The record date for eligibility for payment will be 10 April
2012. The Company will be also offering a scrip dividend
alternative, details of which will be made available to
shareholders shortly.
5. The financial information set out in this announcement has
been extracted without material adjustment from the audited
accounts of Phoenix Group Holdings for the year ended 31 December
2011. The Ernst & Young Accountants LLP audit opinion on the
Phoenix Group Holdings accounts is unqualified. The Annual Report
& Accounts of Phoenix Group Holdings will be published on 28
March 2012 in advance of the Annual General Meeting on 3 May
2012.
6. This announcement in relation to Phoenix Group Holdings and
its subsidiaries (the 'Group') 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: domestic and global economic and
business conditions; asset prices; market related risks such as
fluctuations in interest rates and exchange rates, and the
performance of financial markets generally; the policies and
actions of governmental and/or regulatory authorities, including,
for example, new government initiatives related to the financial
crisis and the effect of the European Union's "Solvency II"
requirements on the Group's capital maintenance requirements; the
impact of inflation and deflation; market competition; changes in
assumptions in pricing and reserving for insurance business
(particularly with regard to mortality and morbidity trends, gender
pricing and lapse rates); the timing, impact and other
uncertainties of future acquisitions or combinations within
relevant industries; risks associated with arrangements with third
parties, including joint ventures; inability of reinsurers to meet
obligations or unavailability of reinsurance coverage; the impact
of changes in capital, solvency or accounting standards, and tax
and other legislation and regulations in the jurisdictions in which
members of the Group operate.
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
this announcement. The Group undertakes no obligation to update any
of the forward-looking statements contained within this
announcement or any other forward-looking statements it may make.
Nothing in this announcement should be construed as a profit
forecast.
Phoenix group holdings
annual report and accounts 2011
Introduction
Business overview
Phoenix Group is the UK's largest specialist closed life and
pension fund consolidator with approximately 6 million
policyholders and in excess of GBP72 billion of assets under
management.
As a closed life fund consolidator Phoenix Life focuses on the
efficient run--off of existing policies, maximising economies of
scale and generating capital efficiencies through operational
improvements. Ignis Asset Management focuses on delivering strong
investment performance and high quality service to its clients.
The Group's strength derives from the combination and leverage
of both the Phoenix Life and Ignis Asset Management businesses.
Our business model
Our business manages closed life funds in an efficient and
secure manner, protecting and enhancing policyholders' interests
whilst maximising value for the Group's shareholders.
Phoenix Life
Aims to deliver innovative financial management and operational
excellence
Ignis Asset Management
Targets superior investment performance, client service and
operational efficiency
Phoenix Group
Delivery of strategic initiatives
Contents
02 Chairman's statement
04 Group Chief Executive Officer's report
Business and strategy
10 Our business
12 Operating structure
16 Our strategy
Business review
20 Key performance indicators
24 Cash generation
27 Group MCEV
30 Group IFRS operating profit
33 Group assets under management
34 Capital management
38 Risk management
42 Principal risks and uncertainties facing the Group
Corporate responsibility
46 Corporate responsibility
46 Environment
47 Community
48 Workplace
50 External stakeholders
Governance
54 Board of Directors
58 Our management team
60 Directors' report
65 Corporate governance report
72 Remuneration report
IFRS financial statements
84 Statement of Directors' responsibilities
85 Independent Auditor's report
86 Consolidated financial statements
93 Notes to the consolidated financial statements
Asset disclosures
166 Additional life company asset disclosures
MCEV supplementary information
173 Statement of Directors' responsibilities
174 Independent Auditor's report
175 MCEV financial statements
179 Notes to the MCEV financial statements
Additional information
189 Shareholder information
193 Glossary
2011 Key performance indicators
GBP810m
Operating companies' cash generation
42p
Dividend per share
GBP2,118m
Group MCEV
GBP72.1bn
Group assets under management
GBP387m
Group IFRS operating profit
GBP46m
Asset management IFRS operating profit
GBP1.3bn
IGD surplus (estimated)
46%
Gearing ratio
GBP3.1bn
IGD Excess Capital (estimated)
Chairman's statement
Phoenix Group has enjoyed another year of successful delivery
against our targets. We achieved our target range for cash flow
generation, delivered substantial additional value through
management actions and continued to delever the Group's capital
structure.
These achievements were realised in the face of considerable
market uncertainty and volatility during the second half of 2011,
demonstrating the resilience of the Group and its ability to manage
prudently risk and capital.
I am pleased to report to shareholders that this performance has
led the Board to recommend a final dividend of 21p per share,
bringing the total dividend for the financial year to 42p per
share. Shareholders may again elect to receive their dividends as
scrip.
Since the Premium Listing in 2010, which was a major step
forward for Phoenix, there has been no diminution in the level of
activity undertaken by the Group. We have continued to develop our
operating platform for the management of our closed life funds in
order to deliver greater efficiency, flexibility and resilience in
the face of significant changes in economic and regulatory
environments. The development of 'The Phoenix Way' provides us with
a consistent methodology for the structuring, integration and
management of closed life funds. In addition, Ignis has made
significant progress towards becoming a high performing asset
management business, providing above benchmark investment
performance for our policyholders and developing an attractive
proposition for third party clients.
The Group remains focused on our responsibilities to our 6
million customers, and our custodianship of policyholder assets.
The progress of the Group, in conjunction with our outsourced
partners, to improve customer service and outcomes has continued
and will remain a top priority.
2011 was the first complete year for Phoenix as a Premium Listed
company and a FTSE participant. Details of the Board's activities
are contained in the Corporate Governance Report. I am pleased to
report that an independent Board Evaluation undertaken towards the
end of 2011 concluded that the Phoenix Board is functioning well
and that the quality of the directors and the level of boardroom
debate have improved substantially in the last two years.
In December 2011, we announced that Jonathan Yates, Group
Finance Director, would be leaving the Group to pursue another
opportunity. On behalf of the Board, I should like to express our
thanks to Jonathan for his contribution to the Group and we wish
him well for the future. We will announce his replacement once the
Board has concluded the selection process.
Turning to my own future within the Group, I have indicated my
intention to retire from the Board during the course of 2012, once
a suitable successor has been identified. Whilst the journey is by
no means complete, Phoenix is now well positioned for the next
stage of its development and I have decided that it is the right
time to pass on the baton. Having made this decision, I feel it
appropriate to give my Board colleagues ample notice of my
intention to retire so that the process for the appointment of my
successor can start immediately and with no time pressure to
complete that task.
During the course of 2011, we announced that we had been
approached by a number of parties regarding a possible transaction
with the Group. These approaches were unsolicited and did not lead
to any formal offers being made. They did not distract us from
continuing to work towards our vision of being the saver-friendly,
'industry solution' for the safe, innovative and profitable
management of closed life funds and a leading asset management
business.
I remain confident that given our strategy, the capabilities of
our people and our performance to date, we can deliver this vision
and in so doing, create significant value for our shareholders.
The scale and predictability of the Group's cash flows underpin
our ability to harvest value for our shareholders. This cash flow
has allowed us to make further progress in delevering the Group's
capital structure during 2011 and, in due course, we expect that we
will put in place new banking arrangements to provide the Group
with the long-term capital structure that meets our strategic
objectives and allows the fulfilment of the Group's vision.
In a challenging year for financial markets, Phoenix Group has
demonstrated its resilience and is well positioned for the future.
On behalf of the Board, I should like to thank all of our employees
for their contribution to the Group's success in 2011.
Ron Sandler
Chairman
22 March 2012
group chief executive officer's report
Phoenix has continued to make considerable progress in 2011,
despite volatile market conditions, and has a clear strategy to
deliver shareholder value.
Introduction
At the end of my first year as Group Chief Executive Officer, I
am able to look back at 12 months of substantial achievement. The
effective combination of the closed life fund business of Phoenix
Life and the asset management capability of Ignis has proven itself
able to create value in challenging market environments. We have
continued to develop Phoenix's business model and through 'The
Phoenix Way' we have created a template that can be used to
integrate additional closed life funds in the future.
Despite the volatile investment markets, Phoenix Life and Ignis
have provided strong customer service and investment returns and we
continue to work with our outsourced partners to improve our
proposition for policyholders.
Reterming our debt is our top priority in terms of corporate
activity, as we look to align our debt profile to our longer term
cash flows. The more tranquil market conditions since year end, and
the improvements in our cash position and in our IGD headroom
during 2011, reinforce our confidence in our ability to progress
these reterming discussions.
Group highlights
In 2011, Phoenix Group achieved or exceeded its three financial
operating targets, as set out last year. In particular, we
generated cash flows of GBP810 million from our operating
companies, compared with a target range of between GBP750 million
and GBP850 million. This demonstrates the organic cash generative
nature of our business model, even in difficult macroeconomic
conditions, and has also allowed us to reduce our gearing ratio at
the end of 2011 to 46%, well ahead of our previous target of less
than 50%. We are targeting a further reduction to 43% or below by
the end of 2012.
Our year end MCEV was broadly unchanged at GBP2,118 million,
despite the impact of investment market volatility in the second
half of the year. MCEV included an incremental GBP165 million
delivered through management actions, significantly in excess of
our average annual target of GBP100 million.
Our estimated IGD surplus was GBP1.3 billion at 31 December
2011, up from GBP1.0 billion a year earlier, with headroom over our
IGD capital policy of GBP0.4 billion. During 2011 we undertook
several management actions to strengthen our IGD position through
the simplification of the Group's structure. The headroom over our
IGD capital policy allows us greater flexibility in the repayment
of our bank debt and we have identified additional actions that
will improve this surplus further in 2012.
Phoenix Life highlights
Phoenix Life, led by its Chief Executive Officer Mike Merrick,
contributed IFRS operating profit of GBP395 million, slightly above
the GBP388 million achieved in 2010.
The Group has a well established Solvency II programme and has
continued to progress towards meeting the Solvency II requirements.
The FSA has recently announced a change to the implementation date
of Solvency II to 1 January 2014 (a year later than previously
envisaged) and the Group is on track to meet this timetable.
Underpinning the development of the Solvency II internal model
is the Group's Actuarial Systems Transformation ('AST') project
which will deliver a single actuarial modelling platform across the
business, transforming modelling capability and efficiency.
Our existing long-term relationships with our outsourced
partners are a key aspect of Phoenix's business model, helping us
to ensure our customers are treated fairly whilst managing our cost
base efficiently. Together with Diligenta, our largest outsourced
partner, we have continued to transform our administrative systems,
including completing the transfer of a total of over 2 million live
policies onto the BaNCS policy administration platform. This
transfer from outdated legacy systems to a modern, 'future proofed'
administration platform has provided our policyholders with online
access to their investments, improving both service levels and
transparency. This work will continue during 2012, with the planned
transfer of a further 1 million live policies onto BaNCS.
Ignis highlights
Ignis Asset Management, led by its Chief Executive Officer,
Chris Samuel, was able to increase assets under management,
administration and oversight by 3% to GBP70.7 billion. In addition,
Ignis has shown stable financial performance in difficult markets,
with an IFRS operating profit of GBP46 million in 2011.
Ignis has made excellent progress in strengthening its
investment management capabilities and this has already yielded
results in the investment performance achieved for the Group's life
companies. During 2011, 11 out of 15 of the Group's main life funds
achieved investment performance above their benchmark targets and,
as a result, Ignis has generated significant performance fees
during the year. This clearly demonstrates how we have aligned
policyholder interests with those of our shareholders in the
management of their investments.
Ignis is also in the process of putting in place an appropriate
back office structure to support its future plans by partnering
with HSBC Securities Services to deliver investment administration
and other related activities. As with Phoenix Life, the use of
outsourced partners allows Ignis to focus on the key areas of
investment and distribution, whilst providing a more predictable
and lower cost operating model for the Group.
As the Group's life company assets run-off over time, it is
important that Ignis develops its capabilities and brand as a
manager of third party assets. In 2011 Ignis attracted net inflows
of GBP1.7 billion and given its improved investment performance
across many asset classes, is well placed to build on the progress
it has made in 2011 in developing a strong third party proposition
and expanding into the institutional market.
People
Phoenix Group's business model relies on having the necessary
specialist expertise in closed life fund and asset management. This
involves being able to recruit and retain people who have
outstanding skills in areas such as capital, cost, risk and
investment management. That we have such a team of individuals is a
testament to the Group's capability in recruitment, training and
development, and employee engagement. This capability has now been
externally recognised, with Phoenix being awarded the 2011
Strategic Communications Management (Melcrum) Award for Employee
Engagement.
At the time of going to print I am also delighted to report that
Phoenix Group is one of 'Britain's Top Employers 2012'. This
certification is awarded to companies that have been independently
recognised as being amongst the best companies to work for in the
UK.
These are well-deserved awards, which are also reflected in our
higher than ever employee engagement results.
Customers
'Treating Customers Fairly' is central to how we run our
business. We have streamlined our life companies through a
programme of fund mergers which, together with a rebranding of our
life funds, aims to simplify our policyholder communications and
provide customers with enhanced fund security. A new website for a
number of our life funds will be launched this year to enhance the
online customer experience.
In co-operation with our outsourced partners, we have
transformed many of our systems to improve customer service and
operational efficiency. We have been working diligently to ensure
that any customer complaints are dealt with in an efficient and
timely manner and we have already seen a real improvement in
customer satisfaction in this area.
We are always seeking initiatives that may be of benefit to our
policyholders. During 2011 we launched a scheme to enable some
holders of paid-up life insurance policies to cash these in without
penalty and benefit from the proceeds immediately. This initiative
was a great success, with over 85% of customers involved in the
scheme taking up this offer. Other similar initiatives are being
considered for the remainder of 2012. A team of experts has been
brought together within the life companies to review and enhance
our investment strategy and governance. We also continue, where
possible, to try to improve returns for our policyholders through
the distribution of the estate within the life funds. As a result,
certain maturity payouts are being enhanced in some of our funds by
up to 12%.
Economic and industry overview
As in 2010, financial markets in 2011 were volatile and global
economic growth was subdued. Given the ongoing pressures in the
Eurozone and, in particular, the high sovereign debt of many of its
members, I expect this uncertainty to continue during 2012.
Although Phoenix is not immune to further negative developments in
the region, we have carefully managed our exposure to Peripheral
Eurozone countries, reducing shareholder debt securities held in
Peripheral Eurozone sovereign debt to GBP9 million. We are well
positioned to react to further changes to ensure policyholder and
shareholder investments are secure.
2012 Outlook and prospects
Developing 'The Phoenix Way'
The Phoenix Way characterises an approach and infrastructure for
the efficient and effective structuring, integration and management
of closed life funds and the investments they hold. By applying a
consistent framework across the Group, The Phoenix Way reduces
risk, complexity and cost; improves investment performance;
enhances customer service through effectively working with our
outsourced partners; increases MCEV and releases capital to
shareholders.
During 2011 we have continued to progress our AST project and
have also set out a clear template to ensure that the Group's 14
with-profit funds are managed in a consistent way. This work will
continue in 2012.
Financial targets
Despite the challenging market conditions experienced in 2011 we
have reiterated our operating company cash generation target of
GBP3.2 billion for the six year period between 2011 to 2016. Of
this, we are aiming to deliver operating company cash generation of
between GBP500 million and GBP600 million in 2012 which will be
weighted towards the second half of the year. In addition, we
maintain our previously set annual average target of GBP100 million
of MCEV enhancements through management actions over the period
2011 to 2014.
The combination of cash flow generation and enhancement to MCEV
will allow us to delever the Group's capital structure. Having
already achieved the target to reduce our level of gearing to below
50%, we have now set ourselves a further target to reduce this to
43% or below by the end of 2012.
Conclusion
I look forward to 2012 with confidence and believe that we can
continue to demonstrate the great strengths of Phoenix Life and
Ignis, building and delivering value for all our stakeholders. I
would like to thank my colleagues for their hard work during a
challenging period. Although it is difficult to predict how the
economic climate will develop, the quality of the teams in Phoenix
Group, the discipline with which the Group manages risk and capital
and the proven resilience of its business model will stand us in
good stead during the coming year.
Clive Bannister
Group Chief Executive Officer
22 March 2012
2011 highlights
Financial
Generated GBP810 million operating companies' cash generation -
above the mid-point of the target range
Delivered GBP165 million of MCEV enhancement through management
actions
Reduced gearing to 46% through organic cash generation
Achieved net third party sales by Ignis of GBP1.7 billion
Customer
Increased policyholder payouts through inherited estate
distribution
Improved customer service, including providing online access for
policyholders
Operational
Further simplified life company structure through consolidation
of life companies and recapture of internal reassurance, enhancing
the IGD capital position of the Group
Completed the transfer of 2 million live policies onto the BaNCS
administration platform
De-risked Group pension scheme liabilities through liability
management exercises
Restructured Ignis joint ventures to give the businesses a
greater degree of independence in the future
Initiated the outsourcing of Ignis' back office functions in
partnership with HSBC
Business and strategy
Our business brings together complementary skills to deliver
improved performance for our life company and asset management
customers. With a simple mission and a clear strategy we are well
positioned to capitalise on opportunities to deliver value as they
arise in the future.
In this section
10 Our business
12 Operating structure
16 Our strategy
Our business
Phoenix Group combines the financial and operational expertise
of Phoenix Life with the investment management capabilities of
Ignis to create value for policyholders and shareholders.
Phoenix Life
Aims to deliver innovative financial management and operational
excellence
6m
Policyholders
GBP778m
Cash generation
What we do
Life assurance
Through Phoenix Life we manage life assurance funds which no
longer actively sell new life assurance policies and which run-off
gradually over time. These so-called 'closed life funds' within the
Group consist of millions of policyholders and a total of
approximately GBP63 billion of financial assets.
Phoenix Life manages these funds using its specific skills and
expertise in the areas of capital, financial, risk and cost
management.
How we create value
Unlike open life businesses, we are not required to allocate
significant capital to support the writing and distribution of new
insurance products. This means that the capital requirements of our
operating life companies decline as policies mature, releasing
excess capital as free surplus in the form of cash.
In addition to this released capital we create value from our
in-force book of closed life funds, generating profits from
participation in investment returns, policyholder charges and
management fees earned on assets (to the extent they exceed
expenses). These additional profits from the in-force policies can
also be released by the Group's life companies as free surplus in
the form of cash.
External outsourced partners are used for policy administration
thereby minimising fixed costs.
Ignis Asset Management
Targets superior investment performance, client service and
operational efficiency
GBP70.7bn
Assets under management, administration and oversight
GBP46m
IFRS operating profit
Asset management
Through Ignis, the Group both manages the funds that back the
investments of our policyholders and develops investment
propositions for third party clients in the institutional, retail
and international markets.
Ignis aims to maximise risk-adjusted returns on the assets it
manages for the benefit of policyholders, third party clients and
shareholders.
How we create value
Ignis generates revenues from managing the investments of the
Group's life companies as well as third party clients.
Ignis is incentivised to maximise investment performance for the
Group's policyholders through performance fee arrangements. In
addition, Ignis is seeking to grow the assets it manages for third
party investors in both the retail and institutional markets.
Ignis has announced a restructuring of its operations to support
its future strategy, including the use of its own outsourced
partner to provide investment administration and related back
office services.
Phoenix Group
Value generated by Phoenix Life and Ignis is distributed to the
Holding Companies in the form of cash. The Holding Companies use
this cash to fund group expenses, pension contributions, debt
interest and repayments and shareholder dividends.
The Group functions provide support for, and coordination and
delivery of, the Group's strategic objectives and manages our
relationships with our external stakeholders, including
shareholders, our lenders, our Group pension schemes and the
Financial Services Authority ('FSA').
Operating structure
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.
Group functions
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, Treasury, Group Tax, Group Actuarial, Group Risk, Legal
Services, HR, Corporate Communications, Strategy and Corporate
Development, Investor Relations, Company Secretariat and Internal
Audit.
Phoenix Life
Phoenix Life is responsible for the management of the Group's
life funds. Phoenix Life's experienced and focused management team
is led by its Chief Executive Officer, Mike Merrick. Based in
Wythall, near Birmingham, it has a track record of successfully
integrating life assurance businesses and is developing a
leading-edge model and infrastructure into which future acquired
funds can be integrated.
Manage capital
Phoenix Life continually manages the capital requirements of the
Group's life companies, ensuring that policyholder security is
protected whilst maximising the release of capital as cash to the
Group's Holding Companies. We combine sophisticated asset liability
matching techniques with a prudent approach to risk management to
ensure the Group's life companies are capital efficient.
The Group has continued its programme of activity to further
integrate its life companies in order to optimise capital
allocation and economies of scale. During 2011, the internal
reassurance arrangement between Phoenix Life Limited ('PLL') and
Phoenix Pensions Limited ('PPL') was also recaptured by PLL,
resulting in PPL no longer holding any life assurance business.
As a result, the Group had 6 operating life companies at the end
of 2011, consisting of 14 with-profit funds and 7 non-profit funds.
Further transfers of business will be progressed during 2012.
Simplifying the number of life companies within the Group through
such business transfers both reduces complexity and releases
capital.
Drive value
Driving value consists of more than just targeting enhanced
investment returns. The Group also aims to ensure that unrewarded
exposure to market volatility is minimised or the risks from sudden
market movements are managed through hedging. In addition, regular
re-balancing of asset and liability positions is required to ensure
that only those assets which deliver the appropriate level of
return for the risk assumed are held within life funds and to take
into account any guarantees which attach to the liabilities.
Improve customer outcomes
Improving customer outcomes is a key focus for Phoenix Life.
During 2011, the Group concentrated on some specific areas
including increasing estate distribution for with-profit
policyholders and improving the speed of claims payouts. As in
2010, ensuring fast and efficient claims payouts for our customers
continued to be a priority and in addition to using the
ABI-sponsored Origo service for open market option payments
relating to pension-to-annuity transfers, we also used it for
pension-to-pension transfers during the year. This initiative
reduced transfer times from around 30 days to under 12 days on
average.
Although the life companies are closed and generally do not
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. The Group has a strong and steady stream of internal
annuity vestings at a very low cost, so we can offer policyholders
competitive annuity rates whilst generating additional value for
shareholders.
Management services
The Group's management services companies are charged with the
efficient provision of financial and risk management services,
sourcing strategies and delivering all administrative services
required by the Group's life companies. By using management
services companies, the life companies benefit from price certainty
and a transfer of some operational risks to the management services
companies.
As the number of policies held by the Group gradually declines
over time, the fixed cost base of our operations as a proportion of
policies will increase. Our management services team manages this
risk by putting in place long-term arrangements for third party
policy administration. By paying a fixed price per policy to our
outsourced partners we minimise the fixed cost element of our
operations.
These outsourced partners have scale and common processes, often
across multiple clients, which provide several benefits for the
Group, including converting fixed costs to variable costs, reducing
investment requirements, improving the technology used within our
administrative capability, and reducing our operational risk.
Specialist roles such as finance, actuarial and risk are
retained in-house, ensuring Phoenix Life retains full control over
the core capabilities necessary to manage and integrate closed life
funds.
The Phoenix Way: Methodology
The Phoenix Way characterises an approach and infrastructure for
the efficient and effective structuring, integration and management
of closed life funds and the investments held within them.
The Phoenix Way aims to provide a consistent approach to
managing each Group life company which, given their different
histories, have previously all adopted different methodologies.
The Phoenix Way covers areas such as operational management,
outsourcing, investment management, restructuring and risk
management. Examples include establishing a standardised
with-profit 'model fund', consolidating outsourcing arrangements
and developing standard systems for actuarial modelling as part of
our AST project.
The Phoenix Way also provides a template which can then be
applied in a consistent manner to newly acquired closed life funds
within the Group.
Ignis Asset Management
Ignis Asset Management is the Group's asset management business
and is led by its Chief Executive Officer, Chris Samuel.
It provides investment management 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
largest 15 UK asset management firms, Ignis is responsible for
GBP70.7 billion of assets, including GBP62.1 billion of assets for
the Group's life companies.
With offices in London and Glasgow, and over 540 employees,
Ignis has investment capabilities across multiple asset classes
organised into six investment business units.
Ignis' vision is to develop into a leading asset management
business committed to performance excellence and innovation, where
talented people want to work and, most importantly, where clients
want to invest their money.
The business strategy to develop this vision has four goals:
-- Meeting or exceeding the investment performance expectations
of Ignis' clients
-- Working with clients to provide creative solutions to
changing product needs
-- Maintaining a well controlled and efficient operating
platform
-- As a result, developing further as a high quality, profitable
company.
This strategy is underpinned by:
-- Innovative people focused on Ignis' clients and provided with
the freedom to perform
-- A partnership culture that ensures clear accountability and
supports both the work within Ignis and with Ignis' clients and
counterparties
-- Processes and technology to identify risks and
opportunities
-- Stability that comes from a strong governance and control
culture and being part of the Phoenix Group.
Deploying The Phoenix Way: Actuarial Systems Transformation
('AST')
An important part of The Phoenix Way involves addressing legacy
issues to maximise cost efficiency and improve functionality.
The Group has grown through the acquisition of a number of
closed life fund businesses, resulting in a disparate collection of
actuarial valuation models on a variety of platforms. To address
this, Phoenix Life has entered into a long--term relationship with
Milliman to consolidate these valuation models onto the MG ALFA
platform.
The Group will derive benefits from a number of areas:
-- Reduced operational risk (and associated capital) of
actuarial modelling
-- Improved quality and frequency of capital monitoring
-- Improved cost efficiency by simplification/standardisation of
actuarial processes
-- Creation of an acquisition-ready platform
The AST programme is progressing to plan and will be an
essential part of managing the Group's life businesses under the
Solvency II regime, as well as providing a platform for the
integration of newly acquired closed life funds within the
Group.
Ignis investment business units
Ignis Fixed Income
-- Liquidity
-- Rates
-- Credit
Ignis Equities
-- UK
-- Europe
-- Far East
-- US
-- Global
-- Emerging markets
Ignis Real Estate
-- Unit trust
-- Investment trust
-- Segregated mandates
Ignis Advisors
-- Fund of Hedge Funds
-- Fund of Private Equity
-- Fund of Real Estate
-- Retail multi-manager
Ignis Solutions
-- Liability driven investments
-- Asset liability matching and risk management
Ignis Partners
Investment boutiques:
-- Argonaut
-- Cartesian
-- Castle Hill
-- Hexam
Sales, marketing and client service
Insurance (life company)
UK Institutional
UK Retail
International
Operations, support and controls
Ignis has recently developed a number of pooled funds across a
range of asset classes. The creation of these pooled funds has
allowed Ignis to simplify its relationship with the Group's life
companies by replacing a large number of individually segregated
mandates. In addition, Ignis is incentivised to maximise investment
performance for policyholders through a performance fee
structure.
At the same time, Ignis has further strengthened its investment,
distribution and operations teams in order to develop its
proposition to third party clients. Ignis develops new products
that it believes would be of interest to the third party market,
for example it launched an Absolute Return Government Bond Fund
during 2011. Ignis has also sought to leverage its knowledge of the
requirements of the Group's life companies by creating solutions
which target the provision of Liability Driven Investment ('LDI')
products to the institutional market. An example of the success
that Fixed Income and Solutions have already had in this area was
in winning a GBP430 million LDI mandate from one of the Group's
pension schemes during 2011, competing against other third party
providers.
As part of its strategy to develop the Ignis brand as a third
party asset manager in its own right, Ignis has renegotiated its
joint venture agreement with Argonaut, which will provide the
business with a greater level of independence. As with its existing
partnerships with Castle Hill and Hexam, Ignis will retain a
minority interest in Argonaut.
Ignis has broad distribution capabilities and is well placed to
take its strong investment capabilities to market in the coming
year, with a particular focus on building its position within the
institutional market.
Deploying The Phoenix Way: Outsourcing arrangements
One element of The Phoenix Way involves consolidating our
internal and external arrangements to further transform the model
and improve outcomes for our policyholders and customers. In line
with this, Ignis is planning to enter into a partnership with HSBC
Securities Services to deliver its investment administration and
other related back office administration services. As part of this,
Phoenix Life will also consolidate certain existing ancillary
investment related outsourced services with HSBC.
The benefits of this new partnership to the Group will be
derived from a number of areas:
-- It allows Ignis to focus on its strategic priorities of
investment and distribution
-- HSBC will provide a standard back office framework enabling
Ignis to focus future systems development on the front office
-- It reduces and simplifies the network
-- of external suppliers for both Ignis and Phoenix Life
-- It provides a single source of data for Phoenix Life,
assisting with reconciliation and consolidation work
-- It facilitates the introduction of innovative new products by
enabling Ignis to leverage HSBC's existing capabilities to provide
increased speed to market
OUr strategy
Phoenix Group's strategic journey continues to build on our
recent achievements. Our mission is simple: to improve returns for
Phoenix policyholders and Ignis customers and deliver value for
shareholders.
Areas of strategic focus
Manage capital
Risk management is a key component of the Group's strategic
agenda. The effective management of our risks and the efficient
allocation of capital against them is critical in allowing us to
achieve our strategic and operational objectives. This includes
ensuring there are robust capital policies within the life
companies.
We are well positioned to adapt to new requirements arising from
Solvency II regulatory changes. Simplifying our capital structure
brings greater flexibility and is a fundamental enabler of the
strategic growth ambitions of the Group.
Drive value
At Phoenix we drive value in many ways. There are a number of
management actions undertaken by the Group such as fund mergers and
de--risking which can accelerate cash or increase our MCEV.
Management of costs is also an important aspect of our value
creation. Part of The Phoenix Way involves improving the efficiency
of operational management through the standardisation and
streamlining of key processes across the Group which will in turn
reduce costs, improve performance and maximise value.
Improve customer outcomes
We have three key areas of focus in relation to our
customers:
Value - we aim to manage customer outcomes to their maximum
benefit
Service - customers want to be treated fairly, with empathy and
respect in a timely fashion
Security - customers expect their investment to be secure in a
well managed company.
Engage people
Building its reputation as an employer of choice, the Group
specifically targets, recruits and develops top quality people.
The Group invests in its people whose talent, enthusiasm and
support makes its strategy and objectives achievable.
Developing the platform for growth
During 2011, the Group has made further progress in building a
stable and simplified business. Results to date, both financial and
non-financial, have continued to demonstrate the delivery of our
strategy.
Delivering on our strategy
Phoenix Life
Our objectives for 2011
Optimisation of life company capital through further transfers
of business
Achieve all Solvency II programme critical milestones
Develop with-profit 'Model Fund' investment strategy
Improve speed of payments across all claims and enhance
complaint handling processes
Our achievements in 2011
Recaptured the internal reassurance between PPL and PLL
Acceptance by the FSA of Phoenix's initial Solvency II Self
Assessment template
Established a standardised with-profit 'Model Fund'
Transferred over 2 million live policies from legacy systems to
improve service and contain future costs
Met 12 day industry target for Origo Open Market Option
transfers
Delivered GBP165 million of MCEV enhancement through management
actions
Increased distributable estate by over GBP126 million in
2011
Our priorities for 2012
Progress further funds mergers
Achieve GBP100 million of MCEV enhancing management actions each
year on average from 2011 to 2014
Commence 'Use Test' period running Solvency II comformant
processes in advance of the Internal Model Application
Ignis Asset Management
Our objectives for 2011
Grow third party sales and revenue in Ignis through a number of
areas including:
- Sustained investment performance and service for all our
clients
- Taking Fixed Income and Solutions to market
- Accelerating third party Real Estate growth
- Developing Advisors business
- Harvesting revenues from joint ventures
- Transforming operations.
Increase Ignis brand recognition
Our achievements in 2011
Achieved net third party sales of GBP1.7 billion
Restructured Argonaut joint venture to provide the business with
a greater degree of independence
Initiated an outsourcing of Ignis' investment administration and
back office services, in partnership with HSBC
Strengthened Ignis investment and distribution teams
Our priorities for 2012
Continue to deliver strong investment performance
Develop proposition for third party clients, including for the
institutional marketplace
Complete outsourcing of investment administration and related
back office services
Phoenix Group
Our objectives for 2011
Maintain strong cash flow delivery
Examine opportunities to refinance and/or restructure existing
Group debt arrangements
Further strengthen risk capabilities
Continue to develop our business readiness to acquire and
integrate new closed life funds in the future
Further reduction in tax risks and resolution of legacy tax
issues
Maintain high employee engagement
Achieve employee retention above sector benchmark for each
business unit
Maintain our market presence to ensure visibility of potential
opportunities
Build reputation in public policy arena
Our achievements in 2011
Achieved cash flow generation of GBP810 million
Reduced gearing to 46%, below our 50% target
Resolved a number of legacy tax issues allowing the release of
GBP47 million of provisions on an IFRS basis
Increased employee engagement with an overall Group engagement
score of 74%
Won the 2011 Strategic Communications Management (Melcrum) Award
for Employee Engagement
Launched liability management initiatives for the Group pension
schemes
Our priorities for 2012
Achieve cash flow target of GBP500 million - GBP600 million
Reduce gearing to 43% or below
Improve capital structure
business review
The Group has delivered a strong operating performance across
all areas of its business. Increased cash generation by the
operating subsidiaries and embedded value growth from value
enhancing management actions allowed the Group to meet its targets
for 2011 despite ongoing market volatility.
In this section
20 Key performance indicators
24 Cash generation
27 Group MCEV
30 Group IFRS operating profit
33 Group assets under management
34 Capital management
38 Risk management
42 Principal risks and uncertainties facing the Group
key performance indicators
The KPIs comprise:
GBP810m
Operating companies' cash generation
2010: GBP734m
42p
Dividend per share
2010: 42p
GBP2,118m
Group MCEV
2010: GBP2,104m
GBP72.1bn
Group assets under management
2010: GBP69.6bn
GBP387m
Group IFRS operating profit
2010: GBP373m
GBP46m
Asset management IFRS operating profit
2010: GBP46m
GBP1.3bn
IGD surplus (estimated)
2010: GBP1.0bn
46%
Gearing ratio
2010: 52%
GBP3.1bn
IGD Excess Capital (estimated)
2010: GBP2.8bn
The Group's financial KPIs are analysed overleaf.
GBP810m
Operating companies' cash generation
2010: GBP734m
2009* GBP716m
2010 GBP734m
2011 GBP810m
* Pro forma. For ease of comparison 2009 pro forma information
includes a full year's results for the Pearl businesses even though
Phoenix Group Holdings only acquired the Pearl businesses in the
third quarter of 2009.
Maintaining strong cash flow delivery underpins debt servicing
and repayment as well as shareholder dividends:
Analysis
Continued strong cash generation of GBP810 million by the
Group's operating companies enabled the Group to achieve its 2011
target for cash generation of GBP750 million to GBP850 million
despite challenging market conditions.
Management actions in themselves generated cash flows of GBP359
million, mainly related to restructuring and de--risking
activities.
Definition and calculation
Operating companies' cash generation is a measure of cash and
cash equivalents remitted by the Group's operating companies to the
Holding Companies and is available to cover dividends, debt
servicing and repayment, pension scheme contributions and operating
expenses.
Quantified target
The cumulative cash flow target for 2011 to 2016 is GBP3.2
billion.
GBP500 million to GBP600 million of these cash flows are
expected to be generated in 2012 and will be weighted towards the
second half of the year.
GBP2,118m
Group MCEV
2010: GBP2,104m
2009 GBP1,827m
2010 GBP2,104m
2011 GBP2,118m
The Board considers that MCEV provides the most relevant and
consistent means of assessing the Group's ability to increase
value:
Analysis
MCEV increased by GBP14 million in the period reflecting the
resilience of the Group. Value enhancing management actions
delivered an incremental uplift to MCEV of GBP165 million against a
target of GBP100 million.
Definition and calculation
Note 1 of the MCEV supplementary information sets out the basis
of calculation of Group MCEV.
Quantified target
The Group's target is an average contribution to embedded value
from management actions of GBP100 million per annum between 2011
and 2014.
GBP387m
Group IFRS operating profit
2010: GBP373m
2009* GBP457m
2010 GBP373m
2011 GBP387m
* Pro forma.
The Board considers that Group IFRS operating profit is a more
representative measure of performance than Group IFRS profit before
tax as it provides long-term performance information unaffected by
short-term economic volatility and gives an insight into the
Group's ability to generate cash flows to support dividends(1)
:
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.
Analysis
Group IFRS operating profit of GBP387 million (2010: GBP373
million) reflects a strong performance from both the Group's
operating segments.
Definition and calculation
Note 5 of the IFRS financial statements sets out the basis of
calculation of Group IFRS operating profit.
GBP1.3bn
IGD surplus (estimated)
2010: GBP1.0bn
2009 GBP1.2bn
2010 GBP1.0bn
2011 GBP1.3bn
Insurance Groups' Directive ('IGD') surplus is the regulatory
assessment of capital adequacy on a Group-wide basis:
Analysis
The estimated IGD surplus has increased to GBP1.3 billion with
IGD capital generation of GBP0.6 billion offsetting the payment of
dividends, debt interest and debt repayments of GBP0.3 billion. The
surplus of GBP1.3 billion represents headroom of GBP0.4 billion
(2010: GBP0.1 billion) over the Group's IGD capital policy.
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'). 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% of the with-profit
insurance capital component ('WPICC'), being an additional capital
requirement of with-profit funds, plus 145% of the group capital
resource requirement less the WPICC.
GBP3.1bn
IGD Excess Capital (estimated)
2010: GBP2.8bn
2009 GBP3.1bn
2010 GBP2.8bn
2011 GBP3.1bn
IGD Excess Capital represents 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.
Analysis
The increase in the IGD Excess Capital from 2010 is consistent
with the increase in the IGD surplus. The IGD Excess Capital
coverage percentage was 182% at 31 December 2011 (2010: 170%).
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 35.
42p
Dividend per share
2010: 42p
2009* 15p
2010 42p
2011 42p
* Dividend paid in respect of the 4 month period post
acquisition of Pearl businesses (EUR0.17 converted using the 15
April 2010 exchange rate).
Analysis
The Board has recommended a final dividend of 21 pence per share
bringing the total dividend for the year to 42 pence. The final
dividend is due to be paid on 8 May 2012, subject to compliance
with the processes set out in the Group's main credit facilities
and shareholder approval at the Company's AGM. A scrip dividend
option will be available to shareholders.
GBP72.1bn
Group assets under management
2010: GBP69.6bn
2009 GBP68.3bn
2010 GBP69.6bn
2011 GBP72.1bn
Assets under management are a key driver of operating
profit:
Analysis
Total Group assets under management increased by GBP2.5 billion
to GBP72.1 billion(1) .
The increase was driven by net third party sales of GBP1.7
billion and positive fair value movements on the Group's fixed
interest portfolio which offset the run-off of the closed life
business.
Definition and calculation
Group assets under management represent life company assets
(excluding collateral on stock-lending arrangements), Holding
Company cash, and third party assets managed by Ignis.
1 Includes cash equivalents of GBPnil (2010: GBP39 million).
Cash equivalents are defined by management as investments that can
readily be converted into cash.
GBP46m
Asset management IFRS operating profit
2010: GBP46m
2009* GBP34m
2010 GBP46m
2011 GBP46m
* Pro forma.
Analysis
Ignis' IFRS operating profit of GBP46 million remained stable
(2010: GBP46 million) despite increased costs of new business
development.
Definition and calculation
Ignis' IFRS operating profit excludes non-recurring income and
expenses.
46%
Gearing ratio
2010: 52%
2009 58%
2010 52%
2011 46%
The gearing ratio is the Group's measure of its level of debt
compared to its equity on an MCEV basis:
Analysis
The Group has met its target of reducing gearing to below 50%
through strong cash generation and an increase in MCEV.
Definition and calculation
Gearing is calculated as net shareholder debt(2) divided by the
sum of Group MCEV, net shareholder debt and the present value of
future profits of Ignis.
Target
The Group's target is to reduce the gearing ratio to 43% or
below during the course of 2012.
2 Net shareholder debt is defined as shareholder debt (including
hybrid debt) less Holding Company cash as set out on page 37.
cash generation
GBP810m
Operating companies' cash generation
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-off,
policyholder charges and 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 shareholders and for repayment of outstanding debt.
Although investment returns are less predictable, some of the
investment risk is borne by policyholders.
Holding Companies' cash flows
The statement of cash flows prepared in accordance with IFRS
combines cash flows relating to policyholders and cash flows
relating to shareholders, 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 the
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 shareholders
and which are, therefore, more representative of the cash that
could potentially be distributed as dividends, or used for the
repayment of debt. This cash flow analysis reflects the cash paid
by the operating companies to the Holding Companies, as well as the
uses of those cash receipts.
In 2011, the Group has delivered cash flows from its operating
subsidiaries of GBP810 million, including cash flows of GBP359
million from management actions. The latter increased cash flows
primarily through the restructuring of a portfolio of corporate
bonds and investment and operational de-risking activities.
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
------------------------------------------------------------- ------------ ------------
Cash and cash equivalents at 1 January 486 202
Operating companies' cash generation:
Cash receipts from Phoenix Life(1) 778 708
Cash receipts from Ignis Asset Management 32 26
------------------------------------------------------------- ------------ ------------
Total receipts of cash by Holding Companies(2) 810 734
------------------------------------------------------------- ------------ ------------
Uses of cash:
Operating expenses 52 45
Pension scheme contributions 35 38
Debt interest 122 123
------------------------------------------------------------- ------------ ------------
Total recurring outflows 209 206
Non-recurring outflows 24 79
------------------------------------------------------------- ------------ ------------
Uses of cash before debt repayments and shareholder dividend 233 285
Debt repayments 171 122
Shareholder dividend 55 43
------------------------------------------------------------- ------------ ------------
Total uses of cash 459 450
------------------------------------------------------------- ------------ ------------
Cash and cash equivalents at 31 December(3) 837 486
------------------------------------------------------------- ------------ ------------
2 Includes amounts received by the Holding Companies in respect
of tax losses surrendered to the operating companies.
3 Closing balance at 31 December 2011 includes required
prudential cash buffer of GBP150 million (2010: GBP150
million).
Operating companies' cash generation
Cash remitted by Phoenix Life increased by GBP70 million to
GBP778 million (2010: GBP708 million) reflecting the benefit of
management actions. This strong cash generation coupled with
increased cash flows from Ignis Asset Management of GBP32 million
(2010: GBP26 million) enabled the Group to achieve its target for
cash generation in 2011 of GBP750 million to GBP850 million despite
challenging market conditions.
Phoenix Life free surplus
The generation of free surplus, net of movements in required
capital, underpins the cash remittances from Phoenix Life. The
table below 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:
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
-------------------------------------------------- ------------ ------------
Opening free surplus 750 464
IFRS operating profit 395 388
IFRS investment variances and non-recurring items (336) (73)
IFRS tax (20) 76
Movements in capital requirements and policy 84 405
Valuation differences and other(1) (2) 198
Cash distributed to Holding Companies (778) (708)
-------------------------------------------------- ------------ ------------
Closing free surplus(2) 93 750
-------------------------------------------------- ------------ ------------
1 Includes differences between IFRS valuation of assets and
liabilities and valuation for capital purposes.
2 Position at 16 March 2012 increased to an estimated GBP250 million.
The Phoenix Life IFRS operating profit is discussed in the Group
IFRS operating profit section and reflects recurring margins and
return on surplus assets, within the GBP275 million to GBP325
million expected annual range, plus the effects of non-economic
experience variances and assumption changes.
Movements in capital requirements and policy in 2011 include the
inherent release of capital from the run-off of the life funds as
well as management actions, offset by an increase in capital
requirements in annuity and other non-profit funds due to falling
interest rates in the second half of the year.
Valuation differences and other in 2010 included a GBP125
million benefit from the restructuring of a portfolio of corporate
bonds.
Recurring cash outflows
Operating expenses of GBP52 million (2010: GBP45 million)
increased primarily due to the payment of expenses related to
previous years. The remaining recurring cash outflows were in line
with 2010.
Non-recurring cash outflows
Non-recurring cash outflows of GBP24 million were significantly
lower than in 2010 (2010: GBP79 million) reflecting reduced
investment in the Group's transformation programmes with its
outsourced partners which are nearing completion and the
non-recurrence of certain costs related to the Group's Premium
Listing in 2010.
Debt repayments and shareholder dividend
Debt repayments of GBP171 million in the period comprise a GBP21
million voluntary debt prepayment and scheduled repayments
totalling GBP150 million(1) in respect of the Group's two main
credit facilities.
The shareholder dividend of GBP55 million comprises the payment
of the 2010 final and 2011 interim cash dividend.
Target cash flows
The Group is targeting operating companies' cash generation of
GBP3.2 billion for the period from 1 January 2011 to 31 December
2016:
1 January
2011 to
31 December
2016
Sources of cash flows GBPbn
---------------------------------------------------- ------------
Future cash flows:
Emergence of surplus 1.1
Release of capital 1.1
---------------------------------------------------- ------------
Recurring cash receipts generated by life companies 2.2
Other(2) 0.2
---------------------------------------------------- ------------
Total future cash flows target 2.4
Achieved cash flows 0.8
---------------------------------------------------- ------------
Operating companies' cash generation target 3.2
---------------------------------------------------- ------------
1 This includes GBP1 million paid to Pearl Assurance Limited, a
subsidiary undertaking. Pearl Assurance Limited is a lender under
the Pearl facility.
2 Includes cash flows from Ignis and the management services companies.
GBP500 million to GBP600 million of these targeted cash flows
are expected to be generated in 2012.
The resilience of the cash generation target is demonstrated by
the following stress testing:
1 January 2011 to
31 December 2016
Stress testing GBPbn
----------------------------- -----------------
Base case 6-year projections 3.2
----------------------------- -----------------
20% fall in equity markets 3.1
----------------------------- -----------------
15% fall in property values 3.1
----------------------------- -----------------
75bps increase in yields 3.2
----------------------------- -----------------
Credit spreads widening(3) 2.9
----------------------------- -----------------
Combined stress(4) 2.6
----------------------------- -----------------
3 10 year term: AAA - 52bps, AA - 72bps, A - 104bps, BBB - 152bps.
4 20% fall in equity markets, 10% fall in property, 80bps
increase in yields and credit spreads widening (10 year term: AAA -
70bps, AA - 97bps, A - 140bps, BBB - 205bps).
One-off shocks would be expected to lead to a deferral of cash
emergence rather than a permanent diminution.
Group MCEV
GBP2,118m
Group MCEV
Group MCEV operating earnings(1)
The increase in MCEV despite difficult market conditions
reflects the resilience of the life division and the realisation of
significant value from management actions.
MCEV operating earnings after tax were lower at GBP394 million
(2010: GBP543 million) primarily due to a decrease in the long-term
risk-free rate and the non-recurrence of significant positive
experience variances in 2010.
Year ended Year ended
31 December 31 December
2011 2010
MCEV operating earnings GBPm GBPm
----------------------------------------- ------------ ------------
Life MCEV operating earnings(2) 556 758
Management services operating profit 17 20
Ignis Asset Management operating profit 46 46
Group costs (84) (70)
----------------------------------------- ------------ ------------
Group MCEV operating earnings before tax 535 754
Tax on operating earnings (141) (211)
----------------------------------------- ------------ ------------
Group MCEV operating earnings after tax 394 543
----------------------------------------- ------------ ------------
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. The
Group MCEV does not include the future earnings from their
businesses.
2 Life MCEV operating earnings are derived on an after tax
basis. For presentational purposes Life MCEV operating earnings
before tax have been calculated by grossing up the after tax Life
MCEV operating earnings. Life MCEV operating earnings before tax of
GBP556 million (2010: GBP758 million) are therefore calculated as
GBP409 million operating earnings (2010: GBP546 million) grossed up
for tax at 26.5% (2010: 28%).
Life MCEV operating earnings after tax
Other than vesting annuities and increments to existing
policies, the Group's life division is closed to new business. The
principal underlying components of the life MCEV operating earnings
are therefore the expected existing business contribution together
with non-economic experience variances and assumption changes.
Year ended Year ended
31 December 31 December
2011 2010
Life MCEV operating earnings after tax GBPm GBPm
---------------------------------------------------------- ------------ ------------
Expected existing business contribution 254 306
New business value 13 19
Non-economic experience variances and assumption changes:
---------------------------------------------------------- ------------ ------------
Experience variances 181 264
Assumption changes (18) (38)
Other operating variances (21) (5)
---------------------------------------------------------- ------------ ------------
Total non-economic experience variances and assumption
changes 142 221
---------------------------------------------------------- ------------ ------------
Life MCEV operating earnings after tax 409 546
---------------------------------------------------------- ------------ ------------
Expected existing business contribution
The Group uses long-term investment returns in calculating the
expected existing business contribution. The expected contribution
in 2011 of GBP254 million after tax is GBP52 million lower than in
2010, primarily due to a decrease in the long-term risk-free rate
and a lower opening MCEV for life business. The long-term risk-free
rate is based on the opening position at 1 January.
New business value
New business profits generated from vesting annuities during
2011 were GBP13 million after tax (2010: GBP19 million).
The new business margin is 5% after tax (2010: 5%) and
represents the ratio of the net of tax new business value to the
amounts received as new single premiums.
Non-economic experience variances and assumption changes
Non-economic experience variances and assumption changes
increased MCEV by GBP142 million after tax in 2011, the main driver
being positive experience variances.
Positive experience variances of GBP181 million mainly related
to the benefits of improved asset allocations of GBP95 million,
data cleansing projects of GBP30 million and the resolution of
legacy tax issues of GBP20 million. Experience variances in 2010
included a GBP139 million benefit from the restructuring of a
portfolio of corporate bonds and GBP78 million of tax optimisation
benefits.
Negative assumption changes were primarily driven by a reduction
in assumed surrender rates in funds with valuable policyholder
guarantees.
Management services and Ignis Asset Management operating
profit
Commentary on the management services companies and Ignis Asset
Management operating profit is provided in the Group IFRS operating
profit section.
Group costs
Group costs were GBP84 million before tax in the period, of
which costs relating to Group functions amounted to GBP39 million
(2010: GBP40 million). The balance of the charge in both periods
relates primarily to pension scheme costs, partly offset by
miscellaneous income. The pension scheme costs are different to
IFRS as the MCEV does not recognise pension schemes in surplus.
Reconciliation of Group MCEV operating earnings to Group MCEV
earnings
Group MCEV operating earnings are reconciled to Group MCEV
earnings, as follows:
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
----------------------------------------------- ------------ ------------
Group MCEV operating earnings after tax 394 543
Economic variances on life business (426) 101
Economic variances on non-life business 38 (38)
Other non-operating variances on life business (12) (54)
Non-recurring items on non-life business (9) (75)
Finance costs attributable to owners (123) (168)
Tax on non-operating earnings 169 (54)
----------------------------------------------- ------------ ------------
Group MCEV earnings after tax 31 255
----------------------------------------------- ------------ ------------
Economic variances on life business
Negative economic variances reflect the difference between
actual short-term rates and the long-term investment return
assumption, widening of credit spreads and the fall in equity and
property markets; partly offset by the positive impact of a falling
yield curve.
Economic variances on non--life business
MCEV was positively impacted by a decrease in the market value
of the Tier 1 Bonds which increased MCEV earnings by GBP48 million
before tax (2010: reduced MCEV earnings by GBP40 million before
tax). This gain was partly offset by losses on interest rate swaps
held in the Holding Companies.
Other non-operating variances on life business
Other non-operating variances on life business of negative GBP12
million before tax primarily relate to regulatory change and
systems transformation costs.
Non-recurring items on non--life business
Overall, non-recurring items on non-life business reduced
embedded value by GBP9 million before tax. Non-recurring items
include restructuring costs of GBP51 million (2010: GBP68 million)
and regulatory change and systems transformation costs of GBP12
million (2010: GBP7 million). These costs are offset by a gain of
GBP19 million arising from closing the Pearl Group Staff Pension
Scheme to future accrual and implementing a pension increase
exchange programme and a GBP35 million recovery of historic costs
under the management services agreements with the life
division.
Finance costs attributable to owners
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
------------------------------------- ------------ ------------
Debt finance costs(1) 96 102
Tier 1 coupon(2) 27 66
------------------------------------- ------------ ------------
Finance costs attributable to owners 123 168
------------------------------------- ------------ ------------
1 Finance costs in respect of the Impala and Pearl facility
agreements (and associated swap interest) and the Royal London
Payment in Kind ('PIK') notes and facility.
2 The 2010 amount includes the 2010 coupon and 2009 deferred
coupon on the Tier 1 Bonds. The 2009 deferred Tier 1 Bond coupon of
GBP33 million was paid in November 2010.
Group MCEV
Group MCEV increased by GBP14 million over the year to GBP2,118
million at 31 December 2011 as shown below:
Year ended Year ended
31 December 31 December
2011 2010
Movement in Group MCEV GBPm GBPm
--------------------------------------------------------------- ------------ ------------
Group MCEV at 1 January 2,104 1,827
Group MCEV earnings after tax 31 255
Other comprehensive income:
Actuarial gains on defined benefit pension scheme (net of tax) 32 27
Capital and dividend flows (49) (5)
--------------------------------------------------------------- ------------ ------------
Group MCEV at 31 December 2,118 2,104
--------------------------------------------------------------- ------------ ------------
The actuarial gains on defined benefit scheme relate to the
Pearl Group Staff Pension Scheme and were capped at the point at
which the Scheme returned to surplus on an accounting basis.
Capital and dividend flows in 2011 mainly comprise external
dividend cash payments of GBP55 million.
GROUP IFRS operating profit
GBP387m
IFRS operating profit
Group IFRS operating profit
The Group has generated an IFRS operating profit of GBP387
million (2010: GBP373 million), demonstrating the strength of its
business model.
Year ended Year ended
31 December 31 December
2011 2010
Group operating profit GBPm GBPm
------------------------------- ------------ ------------
Phoenix Life 395 388
Ignis Asset Management 46 46
Group costs (54) (61)
------------------------------- ------------ ------------
Operating profit before tax(1) 387 373
------------------------------- ------------ ------------
1 Operating profit is presented before adjusting items.
Phoenix Life
Operating profit for Phoenix Life is based on expected
investment returns on financial investments backing shareholder 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.
Year ended Year ended
31 December 31 December
2011 2010
Phoenix Life operating profit GBPm GBPm
---------------------------------------------------- ------------ ------------
With-profit 69 55
With-profit where internal capital support provided 66 (7)
Non-profit and unit-linked 206 278
Longer term return on owners' funds 37 42
Management services 17 20
---------------------------------------------------- ------------ ------------
Phoenix Life operating profit before tax 395 388
---------------------------------------------------- ------------ ------------
The owners' one-ninth share of the policyholder with-profit
bonus of GBP69 million increased by GBP14 million on the 2010
result primarily due to higher terminal bonuses following an
increase in maturities, and improved bonus rates.
The with-profit funds where internal capital support has been
provided experienced an operating profit of GBP66 million (2010:
GBP7 million operating loss). The 2011 result included the benefits
of modeling improvements of GBP21 million (2010: negative GBP20
million) and data cleansing benefits of GBP18 million following the
transfer of policies onto the BaNCS policy administration platform.
This was partly offset by a reduction in assumed surrender rates in
funds with valuable policyholder guarantees of GBP5 million (2010:
GBP37 million). The 2010 operating profit included GBP17 million of
margins on funds where internal capital support is no longer
required.
The operating profit on non-profit and unit--linked funds was
GBP206 million (2010: GBP278 million). This includes margin
emergence of GBP162 million (2010: GBP168 million), return on
surplus assets of GBP10 million (2010: GBP18 million) and new
business from vesting annuities of GBP27 million (2010: GBP22
million). The benefits of data cleansing projects of GBP33 million
in 2011 were offset by negative longevity and mortality assumption
changes of GBP29 million. The 2010 result benefited from positive
longevity and morbidity assumption changes of GBP41 million.
The longer term return on owners' funds for 2011 of GBP37
million reflects the asset mix of owners' funds: primarily cash
based assets and fixed interest securities. The investment policy
for managing these assets remains prudent.
The operating profit for management services of GBP17 million
(2010: GBP20 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.
Ignis Asset Management
The operating profit of the asset management business was stable
as the costs of new business development were partly offset by an
increase in fees earned on managing stock lending collateral.
Year ended Year ended
31 December 31 December
2011 2010
Ignis Asset Management operating profit GBPm GBPm
--------------------------------------------------- ------------ ------------
Third party(1) 29 29
Life fund revenue(2) 114 113
Other income 3 2
--------------------------------------------------- ------------ ------------
Total revenues 146 144
--------------------------------------------------- ------------ ------------
Staff costs (64) (59)
Other operating expenses (36) (39)
--------------------------------------------------- ------------ ------------
Total expenses (100) (98)
--------------------------------------------------- ------------ ------------
Ignis Asset Management operating profit before tax 46 46
--------------------------------------------------- ------------ ------------
1 Includes performance fees of GBP1 million (2010: GBPnil).
2 Includes performance fees of GBP33 million (2010: GBP35 million).
The increase in expenses reflects investment in additional asset
management capability together with the infrastructure to support
growth in third party business. This includes new premises in
London, building up support functions and investing in system
architecture.
Group costs
Group costs were GBP54 million in the period of which costs
relating to Group functions amounted to GBP39 million before tax
(2010: GBP40 million). The balance of the charge in both periods
relates primarily to pension scheme costs, partly offset by
miscellaneous income.
IFRS result after tax
The IFRS operating result is reconciled to the IFRS result after
tax, as follows:
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
----------------------------------------------------------------- ------------ ------------
Operating profit before adjusting items 387 373
Investment return variances and economic assumption changes on
long-term business (338) 18
Variance on owners' funds 9 19
Amortisation of acquired in-force business and other intangibles (139) (150)
Non-recurring items 14 (139)
----------------------------------------------------------------- ------------ ------------
(Loss)/profit before finance costs attributable to owners (67) 121
Finance costs attributable to owners (110) (115)
----------------------------------------------------------------- ------------ ------------
(Loss)/profit before the tax attributable to owners (177) 6
Tax credit attributable to owners 79 74
----------------------------------------------------------------- ------------ ------------
(Loss)/profit for the period attributable to owners (98) 80
----------------------------------------------------------------- ------------ ------------
Investment return variances and economic assumption changes on
long-term business
Overall, the Phoenix Life business had unfavourable investment
return variances and economic assumption changes of GBP338 million
in 2011. This reflects the widening of credit spreads and the
falling yield curve as the increase in liabilities calculated on a
prudent basis was not fully offset by a corresponding increase in
assets.
Variance on owners' funds
The favourable variance on owners' funds of GBP9 million for
2011, mainly relates to fair value gains on swaps and gilts held in
the shareholder funds.
Amortisation of acquired in-force business and other
intangibles
Acquired in-force business and other intangibles of GBP2.7
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 GBP121 million (2010:
GBP132 million). Amortisation of other intangible assets totalled
GBP18 million in the period (2010: GBP18 million).
Non-recurring items
Non-recurring items include restructuring costs of GBP37 million
(2010: GBP103 million) and regulatory change and systems
transformation costs of GBP21 million (2010: GBP36 million). These
costs are offset by a gain of GBP37 million arising from closing
the Group's pension schemes to future accrual and implementing a
pension increase exchange programme and a GBP35 million recovery of
historic costs under the management services agreements with the
life division.
Finance costs attributable to owners
Year ended Year ended
31 December 31 December
2011 2010
GBPm GBPm
------------------------------------- ------------ ------------
Debt finance costs(1) 96 102
Other finance costs 14 13
------------------------------------- ------------ ------------
Finance costs attributable to owners 110 115
------------------------------------- ------------ ------------
1 Finance costs in respect of the Impala and Pearl facility
agreements (and associated swap interest) and the Royal London PIK
notes and facility.
Tax credit attributable to owners
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 period attributable to owners is
GBP79 million, based on a loss (after policyholder tax) of GBP177
million. The difference between the actual credit of GBP79 million
and the expected credit (based on the UK corporation tax rate of
26.5%) of GBP47 million primarily reflects the benefit of a
decrease of GBP41 million in deferred tax liabilities as a result
of the ongoing reduction in UK corporation tax rates and a GBP47
million benefit from the resolution of legacy tax issues, partly
offset by the GBP49 million impact of losses and deductions not
fully valued by the Group, or for which relief at the full rate of
tax is not available.
Group assets under management
Group assets under management represent all assets actively
managed or administered by or on behalf of the Group including life
companies' funds managed by third parties. It includes Holding
Company cash and cash equivalents but excludes stock lending
collateral.
Total Group Total including
Life and assets under Stock lending stock lending
Holding Companies Third party management collateral collateral
Group assets under management GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------------ ------------------ ----------- ------------- ------------- ---------------
As at 1 January 2011 62.1 7.5 69.6 9.2 78.8
Inflows - 2.6 2.6 1.6 4.2
Outflows (4.4) (0.9) (5.3) - (5.3)
Market movements 5.8 - 5.8 - 5.8
Other(1) - (0.6) (0.6) - (0.6)
------------------------------ ------------------ ----------- ------------- ------------- ---------------
As at 31 December 2011 63.5 8.6 72.1 10.8 82.9
------------------------------ ------------------ ----------- ------------- ------------- ---------------
1 Includes the transfer of GBP1.0 billion of assets in respect
of the Hexam partnership following its restructuring in 2010.
GBP0.9 billion of third party assets under management in respect of
the Argonaut Capital Partnership are due to transfer from Ignis
administration in the first half of 2012.
Life and Holding Companies' assets increased by GBP1.4 billion
to GBP63.5 billion in the year as positive market movements of
GBP5.8 billion, driven by gilt holdings, offset the run-off of the
closed life business of GBP4.4 billion.
Third party (including Group pension schemes) net inflows were
GBP1.7 billion in the year (2010: GBP1.3 billion) mainly reflecting
strong sales of real estate and liquidity funds and a GBP0.4
billion new rates Liability Driven Investing ('LDI') mandate from
the PGL Pension Scheme.
Of the assets in the table above, Ignis manages, provides
oversight and advisory services on or administers the
following:
Total Ignis Total including
Life and assets under Stock lending stock lending
Holding Companies Third party management collateral collateral
Ignis assets under management GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------------ ------------------ ----------- ------------- ------------- ---------------
Direct asset management 54.7 8.6 63.3 10.8 74.1
Oversight and advice 7.2 - 7.2 - 7.2
Administration 0.2 - 0.2 - 0.2
------------------------------ ------------------ ----------- ------------- ------------- ---------------
As at 31 December 2011 62.1 8.6 70.7 10.8 81.5
------------------------------ ------------------ ----------- ------------- ------------- ---------------
Capital management
GBP1.3bn
IGD surplus (estimated)
GBP3.1bn
IGD Excess Capital (estimated)
Capital management framework
The Group's capital management framework is designed to achieve
the following objectives:
-- Provide appropriate security for policyholders and meet all
regulatory capital requirements whilst not retaining unnecessary
excess capital
-- Ensure sufficient liquidity to meet obligations to
policyholders and other creditors
-- Optimise the overall gearing ratio to ensure an efficient
capital base
-- Meet the dividend expectations of shareholders as set by the
Group's dividend policy, within the restrictions in the Group's two
main credit agreements.
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
policy suite is defined with reference to policyholder security,
creditor obligations, dividend policy and regulatory capital
requirements.
The capital policy of the Holding Companies ensures sufficient
liquidity to meet creditor obligations. This is monitored at both
Executive Committee and Board level.
Targets are established in relation to regulatory capital
requirements 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.
Regulatory capital requirements
Each UK life company must maintain sufficient capital at all
times to meet the regulatory capital requirements mandated by the
FSA(1) . 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 PLHL. The estimated
IGD surplus at 31 December 2011 is GBP1.3 billion (2010: GBP1.0
billion). The components of the estimated IGD calculation are shown
below:
31 December 31 December
2011 2010
GBPbn GBPbn
-------------------------------------------- ----------- -----------
Group capital resources ('GCR') 5.6 5.3
Group capital resource requirement ('GCRR') (4.3) (4.3)
-------------------------------------------- ----------- -----------
IGD surplus (estimated) 1.3 1.0
-------------------------------------------- ----------- -----------
1 Further details on the regulatory capital requirements of the
individual life companies are included within note 42 of the IFRS
financial statements.
The key drivers of the change in solvency position in the year
are:
-- Capital generation items(1) of GBP0.6 billion including
capital benefits from the transfer of the Phoenix & London
Assurance Limited business into Phoenix Life Limited (effective
from 1 January 2011) and the recapture of an internal reinsurance
arrangement
-- Partly offset by the payment of dividends, debt interest and
debt repayments of GBP0.3 billion.
The Group's capital policy, which is agreed with the FSA, is to
maintain GCR at the PLHL level of:
-- 105% of the with-profit insurance component ('WPICC'), being
an additional capital requirement of with--profit funds; plus
-- 145% of the GCRR less the WPICC.
The Group's headroom at 31 December 2011 was GBP0.4 billion
(2010: GBP0.1 billion).
IGD Excess Capital
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.
The excluded capital relates to:
-- The surplus estate of the with-profit funds which is treated
as a policyholder liability for IGD purposes due to the closed fund
nature of the business
-- Restricted surplus which mainly relates to surplus excluded
from the IGD calculation due to the corporate structure of the PLHL
Group.
At 31 December 2011 the IGD Excess Capital was GBP3.1 billion
(2010: GBP2.8 billion) and is reconciled to the IGD surplus as
shown below:
31 December 31 December
2011 2010
GBPbn GBPbn
---------------------------- ----------- -----------
IGD Excess Capital 3.1 2.8
Restricted surplus (0.3) (0.4)
Excess policyholder capital (1.5) (1.4)
---------------------------- ----------- -----------
IGD surplus (estimated) 1.3 1.0
---------------------------- ----------- -----------
1 Capital generation includes increases in GCR as well as reductions in the GCRR.
Sensitivity and scenario analysis
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 stress conditions. The results of that stress
testing are provided below:
Estimated IGD Excess
IGD surplus Capital
---------------------------------------------- ------------ ----------
Base: 31 December 2011 1.3 3.1
---------------------------------------------- ------------ ----------
Following a 20% fall in equity markets 1.3 3.0
---------------------------------------------- ------------ ----------
Following a 15% fall in property values 1.2 3.0
---------------------------------------------- ------------ ----------
Following a 75bps parallel increase in yields 1.2 2.9
---------------------------------------------- ------------ ----------
Following a 75bps parallel decrease in yields 1.2 3.1
---------------------------------------------- ------------ ----------
Following credit spread widening(1) 1.2 2.9
---------------------------------------------- ------------ ----------
Combined stress(2) 1.1 2.5
---------------------------------------------- ------------ ----------
1 10 year term: AAA - 52bps, AA - 72bps, A - 104bps, BBB - 152bps.
2 20% fall in equity markets, 10% fall in property, 80bps
increase in yields and credit spreads widening (10 year term: AAA -
70bps, AA - 97bps, A - 140bps, BBB - 205bps).
The relative insensitivity of the Group's IGD surplus reflects
the impact of hedges put in place as part of the long-term strategy
to protect the Group from extreme market movements. The IGD Excess
Capital is more sensitive to market movements than the IGD surplus
because it includes excess policyholder capital in the
non-supported with-profit funds which hold more equities, property
and non-duration matched credit than other funds. This policyholder
capital is excluded from in the IGD surplus.
Solvency II
The Group has a well established Solvency II programme and has
continued to progress development towards meeting the Solvency II
requirements. 2012 is a key year in the development of Solvency II.
The Omnibus II Directive and the Level 2 Implementing Measures are
expected to be approved by the European Parliament and adopted by
the European Council during 2012. Also, the European Insurance and
Occupational Pensions Authority ('EIOPA') will consult on Level 2
technical standards and Level 3 guidelines and recommendations and
will submit final proposals to the European Commission during the
year. The Group remains actively engaged in supporting the
development of Solvency II through industry consultation and
participation in FSA and ABI industry fora. As part of the
negotiations surrounding the Omnibus II Directive the time frame
for implementation of Solvency II is being discussed. The FSA's
implementation assumptions are that 1 January 2013 will be the date
at which the responsibilities of supervisors and EIOPA will
commence, but Solvency II requirements will not commence for firms
until 1 January 2014.
The Group remains on track to deliver an approved partial Group
internal model and was accepted into the pre-application phase of
the FSA internal model approval process following the submission of
the pre-application qualifying criteria template in 2010. In
respect of the resources the FSA will devote to the pre-application
process, it has stated that it will concentrate its resources on a
smaller population of firms representing a significant market share
and which it regards as having the highest potential impact on its
objectives. The Group is included in this category and remains in
continuous and constructive dialogue with the FSA in this regard.
The Model Governance Committee, established in 2011, will continue
to play a central role in the oversight of the design,
implementation and operation of the partial internal model being
built for Solvency II. Furthermore, the Group's application for
internal model approval will be supported by a continued programme
of education for its Boards, Committees and senior management who
will review and challenge the outputs from the internal model over
the coming year.
The Group's Actuarial Systems Transformation project ('AST')
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.
Capital resources
The primary sources of capital used by the Group are equity and
borrowings.
Leverage
In managing capital the Group seeks to optimise the level of
debt on its balance sheet. The Group's closed book business model
allows it to operate with higher leverage than 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 GBP2,140 million (2010:
GBP2,733 million). The gearing ratio(1) is 46% (2010: 52%) based on
Ignis present value of future profits ('PVFP') of GBP0.4 billion
(2010: GBP0.4 billion) and an MCEV of GBP2,118 million (2010:
GBP2,104 million).
Shareholder debt (including hybrid debt) at 31 December
2011:
31 December 31 December
2011 2010
GBPm GBPm
-------------------------------------------- ----------- -----------
Bank debt at face value
- Pearl facility 400 425
- Pearl loan notes 78 76
- Impala facility 1,993 2,138
- Royal London PIK notes and facility 111 106
Tier 1 Bonds at market value 256 304
PLL subordinated debt at market value 139 170
-------------------------------------------- ----------- -----------
Shareholder debt (including hybrid debt)(2) 2,977 3,219
Holding Company cash and cash equivalents (837) (486)
-------------------------------------------- ----------- -----------
Net shareholder debt 2,140 2,733
-------------------------------------------- ----------- -----------
1 Net shareholder debt as a percentage of the sum of Group MCEV,
net shareholder debt and PVFP of Ignis.
2 The unsecured loan notes of GBP7 million (2010: GBP12 million)
are excluded from this shareholder debt analysis as their repayment
will be funded in 2012 from an escrow account which is not included
in the Holding Company cash and cash equivalents.
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), which have separate security arrangements. Although
these facilities carry favourable interest rates and are tax
efficient, they are scheduled to mature in the period 2014 to
2016.
The Group's target is to reduce the gearing ratio to 43% or
below during the course of 2012.
Liquidity management
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
Risk management lies at the heart of what we do and is a source
of value creation, making it a key component of the Group's
strategic agenda. The Board seeks to ensure that the Group
identifies and manages all risks accordingly, either to create
additional value for its stakeholders or to mitigate any
potentially adverse effects. A summary of the principal risks and
uncertainties facing the Group is provided on page 42.
The Group's Risk Management Framework
The Group operates a Risk Management Framework ('RMF') which
seeks to establish a coherent and interactive set of arrangements
and processes to support the effective management of risk
throughout the Group. The components of the framework are shown
below. The outputs of the RMF provide assurance that risks are
being appropriately identified and managed and that an independent
assessment of management's approach to risk management is being
performed.
During the year, the Group has continued to strengthen the
components of the RMF to ensure that they are aligned with the
requirements of Solvency II and external best practice.
Risk strategy
The Group's risk strategy provides an overarching view of how
risk management is incorporated consistently across all levels of
the business, from decision-making to strategy implementation. It
also sets out how overall risk management within the Group is
proportionate to the nature, scale and complexity of the risks
faced by the business.
Risk appetite
The Group's risk appetite framework consists of a set of
statements and targets that articulate the level of risk the Group
is willing to accept, in pursuit of shareholder value and
achievement of the Group's strategic objectives. The statements
encapsulate policyholder security, earnings volatility, liquidity
and the internal control environment as follows:
-- Capital - The Group and each life company will hold
sufficient capital to meet regulatory requirements in a number of
asset and liability stress scenarios
-- Cash flow - The Group will seek to ensure that it has
sufficient cash flow to meet its financial obligations and will
continue to do this in a volatile business environment
-- Embedded value - The Group will take action to protect
embedded value
-- Regulation - The Group and each life company will, at all
times, operate a strong control environment to ensure compliance
with all internal policies and applicable laws and regulations, in
a commercially effective manner.
The risk appetite framework supports the Group in operating
within the boundaries of these statements by seeking to limit the
volatility of key parameters, defined with respect to the above
statements, under a range of adverse scenarios agreed with the
Board. Risk appetite limits are chosen which specify the maximum
acceptable likelihood for breaching the agreed limits and
assessment against the appetite targets is undertaken through
scenario testing. Breaches of appetite are corrected through
management actions where appropriate.
Risk universe
A key element of effective risk management is to ensure that the
business has a complete and robust understanding of the risks it
faces. Within the Group, these are set out, categorised and defined
in the risk universe.
These risks are monitored and reported across the organisation
to ensure that they are adequately managed.
External communication and stakeholder management
The Group has a number of internal and external stakeholders,
each of whom has an active interest in the Group's performance,
including how it is managing its risks. Significant effort is made
to ensure that our stakeholders have appropriate, timely and
accurate information to support them in forming views of the
Group.
Governance, organisation and policies
Overall responsibility for approving, establishing and
maintaining the RMF rests with the Board. The Board recognises the
critical importance of having an efficient and effective RMF and
appropriate oversight of its operation. There is a clear
organisational structure in place with documented, delegated
authorities and responsibilities from the Group Board to the Board
of Phoenix Life Holdings Limited ('PLHL') and the Executive
Committee.
The RMF is underpinned by the operation of a three lines of
defence model with clearly defined roles and responsibilities for
statutory boards and their committees, management oversight
committees, Group Risk and Group Internal Audit.
First line: management of risk is delegated from the Board to
the Group Chief Executive Officer, Executive Committee members and
through to business managers. A series of business unit management
oversight committees operate within the Group. They are responsible
for ensuring the risks associated with the business's activities
are identified, assessed, controlled, monitored and reported.
Second line: risk oversight is provided by the Group Risk
function and business unit risk and compliance functions and the
Board Risk Committee, which is responsible for the oversight of
risk across the Group. The Board Risk Committee comprises five
Non-Executive Directors, three of whom are independent. It is
supported by the Chief Risk Officer and met six times during the
year.
Third line: independent verification of the adequacy and
effectiveness of the internal controls and risk management is
provided by the Board Audit Committee, which is supported by the
Group Internal Audit function.
Risk organisation
The Chief Risk Officer manages the Group Risk function and has
responsibility for the implementation and oversight of the Group's
RMF. 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
RMF in line with the Group's established standards. The risk
functions ensure that business unit risk committees are provided
with meaningful risk reports and that there is appropriate
information to assess and aggregate risks.
Risk policies
The Group policy framework comprises a set of policies that
support the delivery of the Group's strategy by establishing
operating principles and expectations for managing the key risks to
our business. The policy set contains the minimum control standards
that each business unit must adhere to and report compliance
against through the operation of local processes/procedures. The
policies define:
-- The individual risks the policy is intended to manage
-- The degree of risk the Group is willing to accept (which is
set out in the policy risk appetite statements)
-- The minimum controls required in order to manage the risk to
an acceptable level
-- The frequency of the control's operation.
Each policy is the responsibility of a member of the Executive
Committee who is charged with overseeing compliance with the policy
throughout the Group.
Business performance and capital management
Business unit plans are assessed to ensure that they do not
breach any of the Board's risk appetite statements over the
planning horizon. Business performance is routinely monitored at a
business unit executive level with consolidated reporting against
the annual operating plan approved by the Board and reviewed by the
Executive Committee.
The impact of any proposed changes to the Group's operating plan
and ongoing compliance with the Group's risk appetite statements
are reviewed on a quarterly basis by the Board Risk Committee.
The Group's business units operate capital management processes
that meet the Group's Capital Management Policy. Under these
processes, capital is allocated across risks where capital is held
as a mitigant and, in turn, to individual risk owners who hold risk
capital budgets. The amount of risk capital required is reviewed
regularly to ensure the risk remains within budget. Any increases
in capital allocation required are referred to the relevant
business unit for approval to assess whether the increased capital
allocation requested is within appetite for that particular risk
type or whether further risk mitigation is required.
Risk and capital assessment
The Group operates 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 and
establishes a basis, not only for the approach to risk assessment,
management and reporting 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.
Management information
Overall monitoring and reporting against the risk universe is
undertaken through business unit management committees through to
the relevant business unit executive committee and reported to the
Executive Committee, PLHL Board and Group Board via regular risk
reporting.
The Board Risk Committee receives a consolidated risk report on
a quarterly basis, detailing the risks facing the Group and the
overall position against risk appetite limits. The Board Risk
Committee is also provided with regular reports on the activities
of the Group Risk function.
People and reward
Effective risk management is central to the Group's culture and
its values. Processes are operated that seek to measure both
individual and collective performance and discourage incentive
mechanisms which could lead to undue risk taking. Training and
development programmes are in place to support employees in their
understanding of the operation of the RMF and during 2011, Group
Risk delivered training and awareness sessions across the
Group.
Technology and infrastructure
The Group employs systems to support the assessment and
reporting of the risks it faces as a business and to enable
management to document its key risks and controls and evidence the
assessment of them at a frequency appropriate to the operation of
the control. The Group is continuing to assess the need for
additional systems to further support the embedding of the RMF.
Principal risks and uncertainties facing the group
Risk Impact Mitigation
------------------------- ----------------------------------------- -----------------------------------
In times of extreme The Group has ongoing obligations The Group undertakes regular
market turbulence, to meet payments to creditors monitoring activities in
the Group may not which are funded by the release relation to market risk
have sufficient liquid of capital and profits from exposure, including the
assets to meet its its business units. The emerging monitoring of asset mixes,
payment obligations cash flows of the Group may cash flow forecasting and
or may suffer a loss be impacted during periods stress and scenario testing.
in value. of extreme market turbulence In response to this, the
by the need to maintain appropriate Group may implement de-risking
levels of regulatory capital. strategies to mitigate against
The impact of market turbulence unwanted outcomes. The Group
may also result in a material also maintains cash buffers
adverse impact on the Group's in its Holding Companies
embedded value, financial to reduce reliance on emerging
condition and prospects. cash flows.
------------------------- ----------------------------------------- -----------------------------------
The Group could be The total principal amount The Group undertakes regular
adversely affected outstanding under the Groups meetings and reviews with
by the level of its main credit facilities as the lending banks to ensure
indebtedness and at 31 December 2011 was GBP2,471 open dialogue is maintained
its financing structure. million. These main credit and that all relevant parties
facilities require that a are aware ofthe current
significant portion of the position.
principal amount outstanding
is repaid in the years 2014
to 2016. The Group may need
to refinance the outstanding
principal amounts on terms
which are not as favourable
as the existing terms or it
may be unable to refinance
those obligations at all.
------------------------- ----------------------------------------- -----------------------------------
The potential limitation The Group has ongoing principal The Group puts considerable
on distributions repayment and interest obligations effort into managing relationships
from the Group's to its lending syndicates. with its regulators so that
FSA regulated companies In the event that transfers it is able to maintain a
may impair the ability from the Group's insurance forward view regarding potential
of the Group to service and investment management changes in the regulatory
its existing debt subsidiaries are limited by landscape. The Group assesses
commitments. any law, regulatory action the risks of regulatory
or change in established approach, change and their impact
this may impair the Group's on our operations and lobbies
ability to service these obligations. where appropriate.
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.
------------------------- ----------------------------------------- -----------------------------------
Significant counterparty Assets held to meet obligations The Group regularly monitors
failure. to policyholders include debt its counterparty exposure
securities. Phoenix Life is and has specific limits
exposed to deterioration in relating to counterparty
the actual or perceived creditworthiness credit rating. Where possible,
or default of issuers of relevant exposures are diversified
debt securities or from trading through the use of a range
counterparties failing to of counterparty providers.
meet all or part of their All reinsurance and derivative
obligations; such as reinsurers positions are appropriately
failing to meet obligations collateralised and guaranteed.
assumed under reinsurance
arrangements or derivative
counterparties or stock-borrowers
failing to pay as required.
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.
------------------------- ----------------------------------------- -----------------------------------
Adverse changes in The Group has liabilities The Group undertakes regular
experience versus under annuities and other reviews of experience and
actuarial assumptions. policies that are sensitive annuitant survival checks
to future longevity and mortality to identify any variances
rates. Changes in assumptions 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.
------------------------- ----------------------------------------- -----------------------------------
corporate responsibility
"Corporate Responsibility at Phoenix Group is about doing the
right thing and acting responsibly in everything we do. We wish to
be seen as a company that prospective employees wish to join,
investors wish to support, customers choose to remain with and at
the same time create opportunities to forge links within our local
community."
Clive Bannister
Group Chief Executive Officer
In this section
46 Corporate responsibility
46 Environment
47 Community
48 Workplace
50 External stakeholders
corporate responsibility
At Phoenix Group we are committed to managing our business in a
responsible manner, taking seriously the impact we have on our
employees, our stakeholders, the communities in which we operate
and the wider environment. We believe that operating responsibly
creates value for our business through building the trust and
confidence of our stakeholders.
Corporate Responsibility ('CR') is firmly embedded in our
corporate culture and built into our governance framework through a
Group CR Policy which is sponsored by the Group Chief Executive
Officer.
During 2011 we have taken time to reflect on what has already
been achieved, how this links with our aspirations and how we can
best further develop our programme into the future, being mindful
of the current economic climate.
We have been members of Business in the Community ('BITC') for
the past year, which has given us excellent support and has
provided a useful insight into what has worked best for other
companies - helping us to further shape our programme.
Following the refresh of our Group website at
www.thephoenixgroup.com we now have a comprehensive section for CR,
which explains more about our programme and provides more detail on
our CR activities.
At Phoenix Group we categorise and report on CR in four
areas.
Environment
Our environmental impact is lower than that of many other
industries, however, we recognise that we have a duty to ensure
this impact, however small, is minimised. Our employees also have a
shared desire to protect and preserve the wider environment. As
part of our staff CR awareness programme we provided staff with
information to help them consider their impact on the environment,
both at home and in the workplace.
Some environmentally friendly initiatives undertaken by the
Group this year are noted below:
-- We introduced a paper cup recycling facility (previously 900
cups per day were sent to landfill). This facility joins our other
recycling collections - paper, plastic, cardboard, ink cartridges
and mobile phones
-- Employees collected in excess of five sacks of Christmas
cards which were passed on to a recycling scheme that pledged to
plant 1 tree for every 1,000 cards donated
-- Two new flexible benefit options were introduced: the
opportunity to purchase a bicycle tax-free for use in commuting to
and from work and membership of the Woodland Trust
-- Following site moves all unusable stationery items were
donated to local schools and nurseries and surplus fixtures and
fittings were recycled
-- Our new office site for Ignis in London has an excellent
BREEAM rating, with its own environmental policy. As tenants we are
obliged to comply with this policy.
Looking ahead, some of our plans for 2012 are noted below:
-- By the end of 2012, all of our paper will be Programme for
the Endorsement of Forest Certification ('PEFC') and Forest
Stewardship Council ('FSC') sourced from sustainable, managed
forests
-- IT systems in Phoenix Life and Group will be updated,
including video and teleconferencing facilities thus reducing the
need for business travel. Our existing equipment will be re-used,
recycled or disposed of via a registered 'Waste Electrical and
Electronic Equipment' scheme.
Alan Jones, Group HR Director comments on our CR staff awareness
programme: "We aim to create a fulfilling working environment in
which every individual can excel and contribute to our ongoing CR
programme. By providing a platform for encouraging community and
environmental awareness, we are providing staff with the necessary
skills to make a difference, both at work and at home."
Community
Despite the current economic climate, Phoenix Group continues to
support a number of charity and community initiatives. Our
commitment to the community leads to greater employee engagement
and is welcomed by our customers, suppliers and potential
employees.
The Group's approach to charitable donations is three-fold: an
annual programme of staff fundraising events held at our offices;
matched donations for employees participating in charitable
activity and donations to selected causes.
A staff volunteering programme was also established during the
year and good links were forged with schools and community groups
operating in the vicinity of our largest office in Wythall.
Further details on our community activities are provided within
the Corporate Responsibility section of our Group website.
Charitable giving
During 2011 just under GBP100,000 was donated by Phoenix Group
to selected charities. Our focus has been on selecting and
supporting charities which benefit the local communities in which
we live and work and those nominated by our staff.
In addition to the above donations made by the Group, over
GBP20,000 was raised for charities selected by employees through
fundraising activities organised on our premises.
Volunteering
During the year the Group formalised its volunteering programme
and gave staff at its Wythall site the opportunity to participate
in two one-day events. The first, was undertaken as part of the
national BITC 'Give and Gain Day', whilst the second, was arranged
directly through links with a local secondary school. Both events
were beneficial in helping forge stronger links with the local
community and building employee engagement.
Community links
The Group developed links with a variety of community groups
operating close to its Wythall site including local schools, the
City of Birmingham Choir and the Wythall Community Association.
2011 was the 15th successive year that Ignis Asset Management
was the main sponsor of the annual Women's 10k Road Race in
Glasgow. The race regularly attracts over 12,000 runners and
organisers Glasgow Life estimated that more than GBP1 million was
raised for numerous charitable causes.
Workplace
Phoenix Group employed 1,394 staff at the end of December 2011
across three divisions - Group, Phoenix Life and Ignis Asset
Management, mainly based at sites in London, Wythall and
Glasgow.
Employee engagement
Employee engagement helps drive business performance and so
increases value for our policyholders and shareholders. Phoenix
Group and Phoenix Life were short-listed for the Marketing
Society's Employee Engagement Award, and won the 2011 Strategic
Communications Management (Melcrum) Award for Excellence in
Employee Engagement, highlighting our success in this area. At time
of going to print we are also delighted to report that Phoenix
Group is one of 'Britain's Top Employers 2012'. This certification
is awarded only to organisations that meet the highest standards in
Human Resources policy benchmarking. The companies awarded with
this certification have all been independently recognised as being
amongst the best companies to work for in the UK.
All divisions participated in the same employee survey this year
achieving an overall employee engagement index ('EEI') of 74% with
a response rate of 93%.
Phoenix Life and Group returned an EEI of 78%, an increase of 1%
on 2010, and for all questions, were at or above Financial Services
Benchmark (or Private Sector Benchmark where a Financial Services
comparison is not available). This was the second year that Ignis
participated and its EEI increased from 60% to 68%.
Employee benefits
Our ability to attract and retain the best and most talented
people represents a key focus area for the Group. We continue to
offer our staff access to a range of policies and benefits
including:
-- Personal development plans
-- Transparent remuneration benchmarking and reward
programmes
-- Flexible benefits scheme
-- Share-save scheme
-- Opportunity to participate in regular and transparent
employee surveys
-- Succession planning
-- Fully trained people managers
-- Clear anti-discrimination and anti-bullying policies
-- Access to flexible working arrangements.
Diversity
We value diversity in the workplace and have a strict equal
opportunities policy. At least 11% of our workforce this year is of
'non-white British' origin, and our gender split is 60% male, 40%
female. Three out of nine members of the Group Executive Committee
are female and we have one female non-executive on the Phoenix
Group Holdings Board. Our Chairman commented during the year on
'Women on Boards', noting that we have set targets of two female
directors on the Phoenix Group Holdings Board by 2013 and a further
female director by 2015.
Employee metrics
The Human Resources function continues to monitor employee
metrics related to turnover, sickness and training. Employee
metrics help us to compare ourselves to industry benchmarks and
previous years. Staff turnover is down compared to last year and we
are pleased to report we are now below the industry average of 8.7%
for employees leaving voluntarily. We also recorded one of the
lowest levels of absence through sickness in our sector.
2011 2010 2009
------------------------------------------------------------------ ----- ----- -----
Staff turnover (employees choosing to leave voluntarily) 7.5% 9.9% 3.8%
------------------------------------------------------------------ ----- ----- -----
Annual new starter turnover (number of employees leaving
voluntarily within 12 months of starting) 10.0% 13.0% 7.3%
------------------------------------------------------------------ ----- ----- -----
Percentage of days lost through sickness 1.4% 1.3% 1.6%
------------------------------------------------------------------ ----- ----- -----
Percentage of employees sponsored on a professional qualification 22.6% 17.4% 21.1%
------------------------------------------------------------------ ----- ----- -----
Staff training
In 2011 we started to track two new measures around external
staff training and spend. In addition to the externally run
training days, our Learning and Development team managed a range of
in-house training sessions, ranging from induction programmes,
through to coaching and leadership skills. During the year staff
within our Phoenix Life and Group divisions received training on
our Risk Management Framework, which amounted to 850 training days.
This helps demonstrate our commitment to continuing education
within the workplace and providing our staff with the necessary
skills they need in a market which is becoming increasingly
regulated and highly competitive. Recent benchmarking indicates
that we invest approximately twice the sector average in learning
and development.
2011
---------------------------------------- ------------
Total number of external staff training
days 1,961
---------------------------------------- ------------
Total spend on external staff training GBP1,137,123
---------------------------------------- ------------
External stakeholders
Risk management/governance
Due to the highly regulated nature of our business and the
importance of security to our policyholders, we take risk seriously
and have a dedicated risk management team to measure and monitor
all risks across our business. We also have a strong corporate
governance framework in place. Information about the Group's
management of risk and the Group's corporate governance framework
can be viewed on pages 38 to 43 and 52 to 71 respectively.
Responsible investment
Phoenix Group supports the principles of good stewardship as set
out on our Ignis website www.ignisasset.com. We take our
responsibilities seriously and consider the environmental, social
and governance procedures of companies in which we invest.
Investors
Two external presentations were given during the year by our
Investor Relations department, to allow our investors to understand
better our Phoenix Life and Ignis Asset Management divisions.
Procurement/suppliers
During 2011 we strengthened our Procurement policy, commenced
implementation of our Strategic Supplier Management Framework and
reviewed our standard terms and conditions - all of which are in
line with our CR programme. In 2012 we intend to optimise
collaborative working across our Group with our suppliers and
outsourced partners to achieve a higher level of integrated,
sustainable and responsible supplier relationships.
Media
During 2011, we have kept the local press up-to-date with our CR
initiatives which has helped to share information within our local
community and has consequently led to an increased local awareness
of the Group.
Customers
The Group recognises the responsibility we have to our
customers, as both custodian of their financial assets, supplier of
their pension and investment needs and life cover.
Customer satisfaction
We expanded our research programme to further understand what
our customers think about us and the service we offer. From our
programme of focus groups, detailed telephone interviews and
face-to-face meetings, we believe our customers are happy with the
service they receive from us.
By continually listening to our customers, we can focus on any
areas of improvement to ensure that we provide a responsible, fair
and helpful service.
Improving outcomes
As part of our overall strategy to improve outcomes for our
customers, we wrote to a group of policyholders who held paid-up
life insurance policies, to give them the opportunity to cash in
without penalty and benefit from any proceeds immediately, or to
keep the policy in force for their estate to benefit from the life
insurance pay-out on their death. Over 85% of those contacted who
were eligible for the offer, accepted and chose to cash in their
benefits.
Mike Merrick, Chief Executive Officer, Phoenix Life comments on
the initiative: "We recognised that many customers will have taken
out these policies to cover funeral expenses but with the impact of
inflation, the real value of these policies was eroding. We wanted
to offer these customers a choice - to either keep the policy in
force or take the benefits to save or spend as they choose."
We have worked on improving the way we communicate with our
customers and this will continue to be a focus during 2012. There
are customers who may have forgotten they have a policy with us and
we will be looking at different ways to find these customers and
reduce the incidence of 'missing' customers in the future.
Dealing with complaints
We take complaints very seriously and we recognise that with
approximately six million customers and several million
transactions being handled each year, that there will be occasions
when our customers feel the need to express their dissatisfaction.
It is important that customers can contact us easily when they wish
to complain and that they can be confident of someone resolving the
complaint promptly.
Further information on our complaints data can be viewed on our
website.
Third party services
In line with our 'Treating Customers Fairly' proposition, we
have carefully selected third party providers to offer our
customers an increased range of products and services which we do
not offer ourselves and which meet their needs. For example, we are
currently piloting an arrangement with a specialist annuity
provider to make it easier for our customers to get access to
enhanced annuities.
Conclusion
In summary, 2011 has been a busy year for our CR programme as we
have been formalising and communicating our approach. We are
delighted with the progress that has been made and in particular
the support our employees have given. In 2012, we will give higher
profile to the communication of different aspects of our programme
to our employees and we will set measurable environmental targets.
We are absolutely committed to remaining a responsible organisation
and employer.
For more information on Phoenix Group's Corporate Responsibility
programme, please contact
corporateresponsibility@thephoenixgroup.com.
governance
Strong and effective governance is crucial to our aim 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 UK Corporate Governance Code and profiles of our
Board of Directors.
In this section
54 Board of Directors
58 Our management team
60 Directors' report
65 Corporate governance report
72 Remuneration report
Board of Directors
Ron Sandler
Chairman
Ron Sandler was appointed Chairman of the Company on 24
September 2009. He is Chairman of Ironshore Inc, is an adviser to
Palamon Capital Partners and was Executive Chairman of Northern
Rock plc whilst the bank was in public ownership. 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
Group Chief Executive Officer
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 Services 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.
Alastair Lyons
Senior Independent Director
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 Chairman 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
Non-Executive Director
Ian Ashken is Vice Chairman and Chief Financial Officer of
Jarden Corporation, a NYSE listed Fortune 500 U.S. conglomerate. 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 Bolle 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.
Rene-Pierre Azria
Non-Executive Director
Rene-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 Financiere
Indosuez Inc. in New York. Mr Azria serves as a Director and Audit
Committee member of Jarden Corporation, a NYSE listed Fortune 500
U.S. conglomerate and as a Director 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 Investment and Board Risk Committees.
David Barnes
Non-Executive Director
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
Non-Executive Director
Charles Clarke is a Jersey-resident Chartered Accountant who
spent some 30 years with KPMG. Having 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 acted as an independent
Non-Executive Director ('NED') and established an offshore
governance consultancy and NED recruitment service. His current NED
appointments include SG Hambros Bank. Mr Clarke was appointed to
the Board of Directors of the Company on 18 February 2010. He is a
member of the Board Audit and Board Investment Committees.
Ian Cormack
Non-Executive Director
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
Non-Executive Director
Tom Cross Brown was Global Chief Executive of ABN AMRO Asset
Management (which managed some EUR160 billion of assets, with
offices in 30 countries around the world) from 2000 to 2003, as
well as Chairman of ABN AMRO Asset Management in the UK from 1997
to 2003. Prior to this, he spent 21 years with Lazard Brothers in
London, latterly as Chief Executive Officer of Lazard Brothers
Asset Management. Mr Cross Brown is Non-Executive Chairman of Just
Retirement (Holdings) Limited and is a Non-Executive Director of
Artemis Alpha Trust plc, as well as of other private companies and
charities. Mr Cross Brown served on the Board of Directors of the
former Pearl Group Limited from May 2005 until September 2009. He
was appointed to the Board of Directors of the Company on 24
September 2009. He is Chairman of the Board Investment Committee
and a member of the Board Nomination and Board Risk Committees.
Manjit Dale
Non-Executive Director
Manjit Dale is a founding partner of TDR Capital, a private
equity firm established in 2002. TDR Capital manages over EUR2.6
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 and currently also serves on the Board of
Algeco Scotsman. Mr Dale has over 20 years' experience in private
equity, finance and consulting gained with Bankers Trust, 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 and is a member of
the Board Investment Committee.
Isabel Hudson
Non-Executive Director
Isabel Hudson is a former Executive Director of Prudential
Assurance Company Limited. She was also Chief Financial Officer at
Eureko BV. Ms Hudson is Executive Chair of the National House
Building Council and a Non-Executive Director of QBE Insurance, MGM
Advantage and The Pensions Regulator and a member of the
With-Profit 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
Non-Executive Director
Hugh Osmond founded Punch Group and served as 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. He was
appointed to the Board of Directors of the Company on 2 September
2009 and is a member of the Board Investment and Board Risk
Committees.
David Woods
Non-Executive Director
David Woods is a Fellow of the Institute of Actuaries 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 and was
Non-Executive Chairman of Royal Liver Assurance from 2003 to 2011.
He was appointed to the Board of Directors of the Company on 18
February 2010 and is Chairman of the Board Risk Committee.
our management team
Executive management of the Group is led by the Group Chief
Executive Officer, Clive Bannister, who is supported by the
Executive Management Committee ('ExCo'). ExCo oversees matters
relating to the implementation of the Group's strategy.
Clive Bannister
Group Chief Executive Officer
-- Lead and direct the Group's businesses in delivery of the
Group strategy and business plan
-- Safeguard returns for policyholders and grow shareholder
value
-- Embed a risk-conscious Group culture which recognises
policyholder obligations in terms of service and security
-- Manage the Group's key external stakeholders.
Paul Miles
Acting Group Finance Director
-- Contribute to the development and delivery of the Group's
financial business plan in line with strategy
-- Ensure the Group's finances and capital are managed and
controlled
-- Ensure the Group has effective processes in place to enable
all reporting obligations to be met
-- Support the Group Chief Executive Officer in managing the
Group's key external stakeholders
-- Maximise shareholder value though clear, rigorous assessment
of business opportunities.
Mike Merrick
Chief Executive Officer, Phoenix Life
-- Lead development and delivery of the Phoenix Life business
strategy, including the continued integration of life
businesses
-- Ensure optimisation of outcomes for customers in terms of
both value and security
-- Ensure Phoenix Life deploys capital efficiently and
effectively, with due regard to regulatory requirements.
Chris Samuel
Chief Executive Officer, Ignis Asset Management
-- Lead development of Ignis' business strategy and plans
-- Deliver, over the longer term, Ignis' vision of becoming a
leading asset management business committed to performance
excellence and innovation
-- Ensure Ignis achieves its key goals of meeting or exceeding
investment performance expectations, providing clients with
creative solutions to changing product needs and maintaining a well
controlled and efficient operating platform
-- Ensure Ignis' chosen foundations of innovative people, a
partnership culture, suitable processes and technology and
stability are in place to support these plans.
Fiona Clutterbuck
Head of Strategy, Corporate Development and Communications
-- Support the Group Chief Executive Officer in the formulation
of the strategy and the business planning for the Group
-- Lead implementation of the Group's strategy as regards any
potential acquisitions or disposals
-- Lead external Group Communications in liaison with the Group
Finance Director and Head of Investor Relations.
Alan Jones
Group Human Resources Director
-- Deliver high quality Human Resources services to the
Group
-- Lead the implementation of the Group's employee strategy in
order to recruit, retain, motivate and develop high quality
employees
-- Provide guidance and support on all HR matters to the Group
Chief Executive Officer, ExCo and Group Board.
Jane MacLeod
General Counsel
-- Lead provision of legal advice to the Group Board, other
Group Company Boards, ExCo and senior management
-- Oversee and co-ordinate maintenance of and adherence to
appropriate corporate governance procedures across the Group
-- Design and implement a framework to manage legal risk within
the Group including compliance by Group companies and staff with
relevant legal obligations.
Jean Park
Chief Risk Officer
-- Lead the Group's risk management function, embracing changes
in best practice and regulation including Solvency II
-- Oversee and manage the Group's relationship with the FSA
-- Support the Board Risk Committee in the oversight of the
Group's risk framework, in line with risk strategy and
appetite.
David Richardson
Group Chief Actuary
-- Ensure capital is managed efficiently across the Group
-- Manage the Group's solvency position
-- Lead development of the Group's investment strategy
-- Identify and deliver opportunities to enhance shareholder
value across the Group.
Directors' report
Introduction
Principal activities and business review
The Company is incorporated in the Cayman Islands and has a
Premium Listing on the London Stock Exchange. 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 2011, 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 and strategy' and 'Business review'
sections on pages 8 to 17 and 18 to 43 respectively and is
incorporated by reference into this Directors' report.
Shareholders
Dividends
Dividends for the year are as follows:
Ordinary shares
---------------------------------------------------------------------
Paid interim dividend of 21p per share (last year 21p per share)
Recommended final dividend of 21p per share (last year 21p per share)
Total ordinary dividend of 42p per share (last year 42p per share)
---------------------------------------------------------------------
Share capital
The issued share capital of the Company was increased by
3,017,205 ordinary shares during the year. 12,112 shares were
allotted under the Group's employee share plans and 3,005,093 were
allotted under the Group's scrip dividend scheme for the final 2010
and interim 2011 dividends. At 31 December 2011, the issued
ordinary share capital totalled 174,472,815.
Full details of the authorised, issued and fully paid share
capital as at 31 December 2011 and movements in share capital
during the period are presented in note 16 to the IFRS financial
statements.
The rights and obligations attaching to the Company's ordinary
shares are set out in the Company's Articles of Association ('the
Articles') which are available on the Company's website at
www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.
Where the Employee Benefit Trust ('EBT') holds shares for
unvested awards the voting rights for these shares are exercisable
by the trustees of the EBT at their discretion, taking into account
the recommendations of the Group. For shares that have vested into
respective sub funds underneath the EBT, the voting rights are
exercisable by the trustees of the respective sub funds at their
discretion, taking into account the recommendations of the relevant
participant of the respective sub funds.
Restrictions on transfer of shares
The lock--up restrictions relating to 31,251,401 ordinary shares
ended in July 2011. The orderly market arrangements which were
entered into by certain shareholders and the Company on 22 June
2010 still apply. These arrangements prevent a disposal of any
ordinary shares (that these shareholders 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. The
Prospectus issued by the Company on 4 June 2010 provides further
details of this and is available on the Company's website at
www.thephoenixgroup.com/investor-relations/archive/archive-key-documents.aspx.
Under the Articles, 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).
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 ('FSA') 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.
Substantial shareholdings
Information provided to the Company pursuant to the FSA's
Disclosure and Transparency Rules ('DTR') is published on a
Regulatory Information Service and on the Company's website. As at
22 March 2012, 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 16.05%
Xercise2 Limited 22,610,453 12.96%
Hugh Edward Mark Osmond1 9,161,266 5.25%
Lloyds Banking Group plc 7,051,934 4.04%
Nicholas Berggruen Charitable Trust 6,924,239 3.97%
Royal London Asset Management Limited 6,862,908 3.93%
William Alan McIntosh 6,844,529 3.92%
Alpha--Gamma Shares Limited 6,585,499 3.77%
Martin E Franklin 5,885,048 3.37%
Jeff Greene 5,752,498 3.30%
1 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. Further information and details
can be found within the announcements made on 8 October 2010 and 12
October 2011 and available on the 'Investor Relations' section of
the Company's website at www.thephoenixgroup.com.
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).
Annual General Meeting ('AGM')
The AGM of the Company will be held at 32, Commercial Street, St
Helier, Jersey JE2 3RU on Thursday, 3 May 2012 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.
Board
Board of Directors
The membership of the Board and biographical details of the
Directors are given on pages 54 to 57 and are incorporated by
reference into this report. 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
72 to 82.
During 2011 and up to the date of this report, the following
changes to the Board took place:
-- Jonathan Moss resigned from the Board on 7 February 2011. He
was replaced as Group Chief Executive Officer by Clive Bannister
who was appointed to the Board on 28 March 2011
-- Jonathan Yates resigned from the Board on 21 December
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. 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 AGM following the
appointment.
Following the evaluation of the Board of Directors conducted in
2011 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 re--election at the forthcoming
AGM to be held on 3 May 2012.
The Articles give details of the circumstances in which
Directors 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.
At the Company's AGM held on 13 May 2011, shareholders granted
the Company authority to purchase up to 10% of its issued ordinary
shares. Any ordinary shares purchased under the authority would,
subject to the Cayman Islands Companies Law (as amended), either be
cancelled or held in treasury. These authorities were not used
during the year or up to the date of this report.
Subject to obtaining shareholder approval for the renewal of
this authority at the forthcoming AGM, the Company is authorised to
make purchases of its own shares under Article 20 and make payment
for the redemption or purchase of its own shares in any manner
permitted by the Cayman Islands Companies Law (as amended),
applicable law or regulation, including without limitation, out of
capital, profits, share premium or the proceeds of a new issue of
shares. The Company held no treasury shares during the year or up
to the date of this report.
Directors' remuneration and interests
A report on Directors' remuneration is presented on pages 72 to
82 including details of their interests in shares and share options
or any rights to subscribe for shares in the Company.
Directors' indemnities
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.
Directors' conflicts of interest
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.
Directors' and Officers' liability insurance
The Company maintains Directors' and Officers' liability
insurance cover which is renewed annually.
Governance
Going concern
The Board has followed the UK Financial Reporting Council's
'Going Concern and Liquidity Risk: Guidance for Directors of UK
Companies 2009' when performing its going concern assessment. As
part of its 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 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.
Corporate governance statement
The disclosures required by section 7.2 of the FSA's Disclosure
and Transparency Rules can be found in the Corporate Governance
report on pages 65 to 71 which is incorporated by reference into
this Directors' report.
Financial controls
The Group operates a financial controls policy for the internal
control and risk management systems relating to the process of
preparing consolidated accounts. The policy incorporates minimum
control standards for operating within risk appetite.
Memorandum and Articles of Association
Changes to the Company's Memorandum and Articles of Association
require prior shareholder approval and in some cases, approval of
the Group's main lenders.
The Memorandum and Articles of Association are available on the
Company's website at
www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.aspx.
Re--appointment of the Auditors
Ernst & Young Accountants LLP has indicated its willingness
to continue in office and a resolution that it 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.
Details of fees paid to Ernst & Young Accountants LLP during
2011 for audit and non audit work are disclosed in note 11 to the
IFRS financial statements.
Disclosure of information to Auditors
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.
Company Secretary
The Company Secretary throughout the period was Gerald
Watson.
Contractual/Other
Significant agreements impacted by a change of control of the
Company
Details of the change of control provisions contained in the
amended contingent rights agreements dated 22 June 2010 are set out
in note 15 to the 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
at
www.thephoenixgroup.com/about-us/corporate-governance/articles-of-association.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.
Essential contracts or arrangements
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.
Supplier payment policy
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.
Employees
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.
Political donations
No political donations were made during the year ended 31
December 2011. 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.
Charitable contributions
During the year the Group made charitable donations of GBP98,083
details of which are presented in the Corporate Responsibility
section on pages 44 to 51.
Clive Bannister Alastair Lyons
Group Chief Executive Officer Audit Committee Chairman
St Helier, Jersey 22 March 2012
Corporate Governance Report
Introduction
The Company is a member of the FTSE 250 Index, having achieved a
Premium Listing on the London Stock Exchange in July 2010. The
Board is committed to high standards of corporate governance and
supports the UK Corporate Governance Code ('the Code') which sets
standards of good practice for UK listed companies. The Code has
applied to the Company from 1 January 2011 and the Company has
implemented those new aspects of the Code which were not included
in its predecessor, the Combined Code on Corporate Governance. In
particular, in relation to the more notable new provisions of the
Code, all Directors of the Company are subject to annual
re--election by shareholders and evaluation of the Board will be
externally facilitated at least every three years.
It is the Board's view that the Company has been fully compliant
during 2011 with the provisions set down in the Code with the one
exception that not all Directors were able to attend the AGM (Code
provision E.2.3). This did not impact the AGM as there were no
questions posed at the meeting. It is the Board's intention to
comply with this provision in 2012.
This report sets out details of how the Company has applied the
principles and complied with the provisions of the Code during the
period from 1 January 2011 to 31 December 2011.
The Board
The Board comprises the Non--Executive Chairman, the Group Chief
Executive Officer and 11 other Non--Executive Directors, seven of
whom are independent. Biographical details of all Directors are
provided on pages 54 to 57. The Board considers that the following
Directors are independent as they do not have any interest or
business 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 Code
in assessing the independence of the Directors.
The remuneration of the Directors is shown in the Remuneration
report on pages 72 to 82. The terms and conditions of appointment
of Non--Executive Directors are on the Group's website. In
accordance with the provisions of the Articles of Association and
the Code, all Directors will submit themselves for election or
re--election at the Company's AGM on 3 May 2012.
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:
-- Group strategy and business plans
-- Major acquisitions, investments and capital expenditure
-- Financial reporting and controls
-- Dividend policy
-- Capital structure
-- The constitution of Board Committees
-- Appointments to the Board and Board Committees
-- Senior executive appointments
-- Key Group policies.
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 the Executive Management under a
schedule of delegated authorities approved by the Board.
During 2011, the steps taken by the Board to improve its
governance arrangements included:
-- Adopting annual re--election of all Directors in accordance
with the Code
-- Undertaking an externally facilitated Board, Board Committee
and individual Director evaluation
-- Undertaking a successful AGM at which all resolutions were
passed by a majority of at least 96% of votes cast
-- Establishing a Board Investment Committee in response to the
Board evaluation undertaken at the end of 2010
-- Enhancing the Board education programme in response to the
Board evaluation undertaken at the end of 2010, in particular
including site visits to operational business units and
presentations from management in those units
-- Publishing a Chairman's statement on "Women on Boards" in
accordance with the Lord Davies Review
-- Holding a two--day event to review and debate strategy.
The head office of the Company is in Jersey and, as such, the
Board and its Committees hold their meetings in Jersey.
The Chairman, Group Chief Executive Officer and Senior
Independent Director
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 54.
The Senior Independent Director, appointed by the Board, is
Alastair Lyons. His role is to be available to shareholders whose
concerns are not resolved through the normal channels or when such
channels are inappropriate. He is also responsible for leading the
annual appraisal of the Chairman's performance by the
Non--Executive Directors (which was undertaken in the latter part
of 2011) and for leading the process for appointment of a new
Chairman, when appropriate.
Board effectiveness
In accordance with the Code, an evaluation of the performance of
the Board and that of its Committees and individual Directors was
undertaken in the latter part of 2011 and was externally
facilitated by Egon Zehnder International ('EZI') who is
independent of the Company.
The process involved completion by Directors of a questionnaire
covering various aspects of Board and Director effectiveness,
followed by individual meetings between EZI and each Director,
concluding in a Board report which was discussed by the Board in
November 2011. The process and report covered the following
areas:
-- Board structure and composition
-- Board dynamics and relationship
-- Board processes
-- Board committees
-- People and people processes
-- Company strategy and performance
-- Capital, risk and tracking board effectiveness
-- Strategic and operational issues.
An action list, with senior executive accountability, has been
established to address the recommendations from the evaluation. The
EZI review concluded as follows:
"Phoenix has a well functioning Board and has made substantial
steps to improve the quality of Directors and the level of debate
over the past two years. Overall, this Board effectiveness review
concurs with Phoenix's own tracking process that most of the
previous recommendations have been implemented with a few minor
exceptions."
A review of each Director's individual performance took place as
part of the evaluation and the output from this will be used 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 Board Nomination Committee in January 2012.
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 knowledge of the
Company, all Directors receive regular presentations on different
aspects of the Company's business and on financial, legal and
regulatory issues.
Operation of the Board
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 met seven times
during 2011 and is scheduled to meet seven times in 2012 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, as they did on several occasions in 2011.
Attendance by each of the Directors at Board meetings and at
Committee meetings for Committees of which they were a member
during 2011 was:
Board Nomination Audit Remuneration Risk Investment
Meetings Committee Committee Committee Committee Committee
--------------- --------------- --------------- --------------- --------------- ---------------
Maximum Actual Maximum Actual Maximum Actual Maximum Actual Maximum Actual Maximum Actual
---------------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Chairman
Ron Sandler 7 7 4 4 - - - - - - - -
Executive
Directors
Clive Bannister1 6 6 - - - - - - - - - -
Jonathan Yates 7 7 - - - - - - - - - -
Non--Executive
Directors
Alastair Lyons 7 7 - - 7 7 - - - - - -
Ian Ashken 7 7 - - - - - - - - - -
Rene--Pierre
Azria 7 7 - - - - - - 6 5 2 2
David Barnes 7 7 - - 7 7 8 8 - - - -
Charles Clarke 7 7 - - 7 7 - - - - 2 2
Ian Cormack 7 7 4 4 - - 8 8 - - - -
Tom Cross
Brown 7 7 4 3 - - - - 6 6 2 2
Manjit Dale 7 6 - - - - - - - - 2 1
Isabel Hudson 7 7 - - - - 8 7 6 6 - -
Hugh Osmond 7 7 - - - - - - 6 6 2 2
David Woods 7 6 - - - - - - 6 5 - -
---------------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
1 Clive Bannister was appointed to the Board on 28 March 2011.
Jonathan Moss resigned from the Board on 7 February 2011, having
attended one Board meeting during 2011.
Board Committees
The Board has delegated specific responsibilities to five
standing committees of the Board. The terms of reference of the
Committees can be found on the Company's website.
Audit Committee
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 Code that the Audit Committee should
consist of at least three independent Non--Executive Directors of
whom at least one has recent and relevant financial experience. The
Audit Committee met seven times during 2011.
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.
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 those 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.
Audit Committee's principal activities during 2011
-- Reviewed the Company's 2010 Annual Report and Accounts, 2011
interim financial statements and 2011 interim management
statements, recommending their approval to the Board, as well as
related disclosures and the financial reporting process, supported
by reports from management and the external auditors
-- Reviewed the financial forecasts prepared by management,
supported by the sensitivity analysis on the key assumptions
underpinning the forecasts, in support of the assumption that the
Group will continue as a going concern and in support of dividend
payments
-- Assessed the effectiveness of both the external auditors and
the internal audit function, the latter supported by an external
effectiveness review
-- Approved the Group Internal Audit Charter and the Group
Internal Audit Plan (including its link to the Risk Management
Framework), receiving regular reports to monitor progress against
the plan
-- Reviewed the engagement and remuneration of the external
auditors, recommending their re--appointment to the Board and
thence to shareholders
-- Reviewed and monitored the independence of the external
auditors including their provision of non--audit services
-- Reviewed arrangements for whistleblowing should an employee
wish to raise concerns, in confidence, about any possible
improprieties
-- Reviewed the internal controls effectiveness report prior to
its consideration by the Board.
Nomination Committee
Ron Sandler, Chairman Ian Cormack Tom Cross Brown
The composition of the Nomination Committee is in accordance
with the requirements of the Code that a majority of its members
should be independent Non--Executive Directors. The Nomination
Committee is responsible for considering the size, composition and
balance of the Board; the retirement and appointment of Directors;
succession planning for the Board and senior management and making
recommendations to the Board on these matters. The Nomination
Committee met four times in 2011.
The standard process used by the Committee for Board
appointments involves the use of an external search consultancy to
source candidates external to Phoenix (and may in the case of
executive appointments also consider internal candidates). Detailed
assessments of short--listed candidates are undertaken by the
search consultancy, followed by interviews with Committee members
and other Directors and the sourcing of references before the
Committee recommends the appointments to the Board.
Nomination Committee's principal activities during 2011
-- Delivery of recommendations to the Board in connection with
the appointments of the Group Chief Executive Officer and Group
Finance Director
-- Review of the balance of skills, knowledge and experience of
the Board, taking account of the Board evaluation report
-- Review of the structure, size and composition of the Board,
taking account of the Board evaluation report
-- Given the above, delivery of recommendations to the Board to
approve the AGM notice stating that the performance of each
director continues to be effective and demonstrates commitment to
the role
-- Assessment of Board succession planning with the agreement
that a further review, to include senior management succession
planning, would be undertaken by the Committee in January 2012
utilising the results of the external Board evaluation undertaken
at the end of 2011
-- Consideration of the Lord Davies Review of 'Women on Boards'
and the Chairman's statement as follows which was released on the
Phoenix Group website:
"The Nomination Committee, which I chair, will continue to
review on a regular basis the experience, skills, knowledge and
independence of the Board. This encompasses, and will continue to
encompass, the recommendations of the Lord Davies Review titled
'Women on Boards'. Phoenix Group supports the recommendations in
principle and we believe that it is appropriate for FTSE 350
companies to set out clear targets for female representation on
their Boards. We are a recently listed FTSE 250 Company (from July
2010) and none of our Directors was appointed to the Board prior to
September 2009. As we already have a large Board of 14 Directors
(including one female director) and are unlikely to want to
increase its size, it is difficult at this stage to commit to firm
percentages regarding the number of women on our Board in 2013 and
2015. Nonetheless, we have set targets of two female directors by
2013 and a further female director by 2015. Our overriding aim
remains the appointment of the most appropriate candidates to the
Board.
We embrace equality of opportunity in all parts of our
organisation and I am pleased to say that we have three female
members out of nine on our Executive Committee."
Remuneration Committee
Ian Cormack, Chairman David Barnes Isabel Hudson
The composition of the Remuneration Committee accords with the
requirements of the Code that the Remuneration Committee should
consist of at least three independent Non--Executive Directors. The
Remuneration Committee met eight times during 2011.
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. These include pension rights and
executive incentive schemes to encourage superior performance.
Details of the remuneration structure and the Committee's
activities in 2011 are provided in the Remuneration report on pages
72 to 82.
Hewitt New Bridge Street (up to August 2011) and FIT
Remuneration Consultants (from August 2011) provided advice to the
Remuneration Committee and are independent of the Company.
Risk Committee
David Woods, Chairman Rene--Pierre Azria Tom Cross Brown Isabel
Hudson Hugh Osmond
The establishment of a Risk Committee is not a requirement of
the Code. However, the Board believes such a Committee is important
to ensure the robust oversight of the management of risk within 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 titled 'A
review of corporate governance in UK banks and other financial
industry entities'.
The Risk Committee met six times in 2011.
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. Details of the Risk Management Framework, for which
the Risk Committee has oversight, are provided in the Risk
Management section on pages 38 to 43.
Risk Committee's principal activities during 2011
-- Recommending to the Board approval of the Group's risk
appetite
-- Recommending to the Board the Group's overall risk management
strategy
-- Recommending to the Board the Group's principal risk
policies
-- Approval of the Group Risk function's 2011 plan
-- Consideration of any breaches of the Group's risk
appetite
-- Monitoring of compliance and satisfying itself that action
plans to address significant breaches of the Group's principal risk
policies are sufficient
-- Reviewing the Group's risk profile and monitoring it against
the FSA risk categories of Market, Insurance, Credit, Liquidity and
Operational with particular attention to risk appetite, risk
trends, risk concentrations, provisions, experience against budget
and key performance indicators for risk
-- Consideration of risks, issues and matters that were
escalated from principal business unit risk committees to ensure
adequate coverage of the Group's significant business risks and
systems of internal control
-- Oversight of and challenge to, the design and execution of
the Group's stress and scenario testing, including any changes of
assumptions.
Investment Committee
Tom Cross Brown, Chairman Rene--Pierre Azria Charles Clarke
Manjit Dale Hugh Osmond
The Investment Committee was formed in May 2011 in response to a
recommendation from the Board evaluation undertaken at the end of
2010 to provide greater focus on investment strategy and
performance. The Committee reviews investment performance and
strategic asset allocation across the Group. It held its first two
meetings in 2011 and is scheduled to meet four times in 2012.
Communication with shareholders
The Company places considerable importance on communication with
shareholders and regularly engages with them on a wide range of
issues.
The Company's Investor Relations department is dedicated to
facilitating communication with investors and analysts and an
active investor relations programme is maintained. The Company
continued to increase its communication and engagement with the
investment community during 2011. The Chairman, Senior Independent
Director and Executive Directors are available to meet investors
and analysts when required. At these meetings a wide range of
relevant issues including strategy, performance, management and
governance are discussed. Should major shareholders wish to meet
newly appointed Directors, or any of the Directors generally, they
are welcome to do so.
The Directors consider it important to understand the views of
the market and in particular any issues which concern them. Board
members regularly receive copies of the latest analysts' reports on
the Company and the sector, as well as market feedback to further
develop their knowledge and understanding of external views about
the Company. The Chairman and the Non--Executive Directors provide
feedback to the Board on topics raised with them by major
shareholders. In addition, an independent investor perception study
is conducted periodically. The Company held two investor days in
2011 and going forward, it plans to hold these on a recurring
basis.
The Company's AGM provides another opportunity to communicate
with its shareholders. At the 2011 meeting, the Company complied
with the Code provisions relating to voting and the separating of
resolutions. Shareholders were invited to ask questions during the
meeting. It is intended that the same processes will be followed at
the 2012 AGM and that shareholders will have an opportunity to meet
with the Directors following the conclusion of the formal part of
the meeting. In line with the 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. These are available on the Company's website at
www.thephoenixgroup.com, along with a wide range of relevant
information for private and institutional investors, including the
Company's financial calendar.
Financial reporting and going concern
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 2011 (as noted
on page 84).
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Business and strategy and Business review
sections on pages 8 to 17 and 18 to 43 respectively.
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.
Review of system of internal controls
The Code requires Directors to review the effectiveness of the
Company's risk management and internal control systems which
includes financial, operational and compliance controls. The Board
has overall responsibility for the Group's risk management and
internal control systems 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 22 March 2012.
Where any significant weaknesses were identified, the actions
required to address them have been taken, or are being taken and
monitored.
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 2011,
in accordance with the 'Internal Control: Guidance to Directors'
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.
Remuneration Report
Phoenix Group - Directors' Remuneration report
for the year ended 31 December 2011
Dear Shareholder
I am pleased to introduce the Remuneration report for 2011.
Following the changes to the senior executive remuneration
arrangements made last year as a result of the Company's Premium
Listing, the Remuneration Committee ('the Committee') has
determined that these arrangements remain appropriate for 2012.
In considering the remuneration arrangements, the Committee has
been mindful of the intense scrutiny to which executive
remuneration is currently subject including through the Financial
Services Authority ('FSA') Remuneration Code and through the
Department for Business, Innovation and Skills review into
executive remuneration more generally. The Committee seeks to have
regard to the highest levels of governance and to reflect
developments in best practice.
The main elements of the Executive Directors' packages, which
are set out in more detail in the report which follows, are:
-- Base salary levels are appropriate for the size and
complexity of the business, given relevant market data
-- Annual incentive maximum potential remains appropriate at
150% of base salary with 20% of potential based on personal and
strategic measures and 80% of potential based on corporate embedded
value, cash generation and expense management targets, with
one-third of any incentive deferred into shares for three years.
The only changes for 2012 are to increase the weighting of the
expense management target, given the Board's continued focus on
expense management, and to extend the deferral provisions to a
wider population
-- Consistent with best practice, the Committee operates a
claw--back provision which will operate for any annual incentive
amounts subsequently found to have been based on materially
inaccurate results
-- The structure of the long--term incentive arrangement and the
use of embedded value and cash generation performance metrics
remain appropriate and in line with the Group's strategy. The
current expectation is that awards to be granted in April 2012 will
be at similar levels and be based on similar performance metrics to
those granted in April 2011 (with Total Shareholder Return ('TSR')
also being considered) with the precise targets set just prior to
the awards being granted
-- Consistent with best practice, the Committee operates share
ownership guidelines. Executive Directors are required to build and
maintain a specified shareholding in the Company (200% of salary
for the Group Chief Executive Officer and 100% of salary for the
Group Finance Director) through the retention of all post--tax
shares which vest under the Long--Term Incentive Plan ('LTIP') (or
any other discretionary long--term arrangement introduced in the
future) until target holdings have been achieved.
The Committee considers that the current arrangements are
appropriate to the Group and its commercial situation and reflect
UK best practice. I encourage shareholders to support the
arrangements.
Ian Cormack
Remuneration Committee Chairman
22 March 2012
Introduction
Although not required for 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 FSA's Listing Rules and describes how the Board has complied
with the provisions set out in the UK Corporate Governance Code
relating to remuneration matters. This report sets out the policy
for the financial year just ended, for the forthcoming financial
year and, subject to ongoing review, for subsequent financial
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 unaudited and audited information.
Unaudited information
Remuneration Committee
The Group established the Committee on 18 February 2010. The
terms of reference of the Committee are available at
www.thephoenixgroup.com. During 2011, the Committee's main
responsibilities were to:
-- Establish and operate a framework for remuneration throughout
the Group, with particular emphasis on aligning the remuneration
policy with the overall aims and risk appetite of the Group
-- Determine and recommend to the Board the remuneration policy
and the approval of all elements of pay for each of the following
categories: the Chairman of the Board; Executive Directors;
Executive Committee members; those individuals receiving a base
salary greater than GBP200,000 or who have total target pay or
receive an award on joining to buy--out value from a former
employer which warrants the attention of the Committee even if
their salary is below GBP200,000; and those individuals who perform
a significant influence function and/or undertake activities which
could have a material impact on the risk profile of the Group
-- Review the design of, and agree targets for, any
performance--related incentive schemes operated by the Group and
approve the total annual payments made under such schemes
-- Review the design of all share--based plans (or other plans
requiring shareholder approval) for approval by the Board and
shareholders, including the overall level of awards in any year,
the individual award levels for Executive Directors and senior
executives and performance targets
-- Select, appoint and determine the terms of reference for
independent remuneration consultants to advise the Committee
-- Approve remuneration practices within Ignis, applying similar
overall principles as applied to the rest of the Group but relating
these to an appropriate peer group of asset managers.
The table below shows the independent Non--Executive Directors
who served on the Committee during 2011 and their date of
appointment:
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 2011, eight Committee meetings were held and
details on attendance at these meetings are set out in the
Corporate Governance report on page 67.
None of the Committee members have 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 his or her own
remuneration.
The Board has agreed that from 2012, certain responsibilities of
the Committee should be assumed by a Committee of the Board of
Phoenix Life Holdings Limited, the highest EEA insurance holding
company within the Group. In particular, that Committee will
oversee remuneration relating to UK based employees other than
Executive Directors. The initial members of the two Committees will
be the same. This will not impact the governance of remuneration
from an external perspective, but it will simplify the oversight of
remuneration matters affecting UK based employees.
Advice
The Committee received independent remuneration advice during
the year from its appointed adviser, Hewitt New Bridge Street
('HNBS'), part of Aon Hewitt (up to August 2011) and FIT
Remuneration Consultants ('FIT') (from August 2011). A separate
team within Aon Hewitt also provided advice to the Group in respect
of actuarial pension services. The Committee did not believe that
the independence of its adviser was compromised by this
appointment. Both HNBS and FIT are members of the Remuneration
Consultants Group (the professional body for consultants) and
adhere to its code of conduct.
The Committee also consulted with the Group Chief Executive
Officer, Group HR Director and General Counsel who attended, by
invitation, various Committee meetings during the year although no
Executive is permitted to participate in discussions or decisions
regarding his or her own remuneration. Input is also sought from
the Chief Risk Officer.
Remuneration policy
General policy
Executive remuneration packages are structured so that they:
-- Are aligned to the Group's strategy
-- Are aligned with the interests of shareholders, with a
significant proportion being performance--related to areas which
impact value
-- Are competitive but not excessive, in relation to the UK life
assurance and asset management markets
-- Do not promote unacceptable behaviours or encourage
unacceptable risk taking. In particular, the Committee recognises
the interdependence of colleagues within an insurance business and
so focuses the annual incentive targets for senior executives on
the delivery of corporate financial targets. Within Ignis,
consistent with standard industry practice, targets are more
focused on individual objectives (but subject to a pool linked to
overall Ignis profitability)
-- Take into account Group--wide pay and employment conditions.
The Committee reviews the average Group--wide base salary increase
and bonus costs and is responsible for all discretionary and all
employee share--based arrangements.
There are five main elements of the remuneration package for
Executive Directors and senior executives:
-- Base salary
-- Benefits
-- Pension
-- Annual incentives
-- Long--term incentives.
The policy for Executive Directors for 2011 is described in more
detail below.
Base salary and benefits
Executive Directors' base salaries are reviewed annually by the
Committee by reference to median data 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 2012 From 1 January 2011
---------------- ----------------------------- ------------------- -------------------
Clive Bannister1 Group Chief Executive Officer GBP700,000 GBP700,000
Jonathan Yates2 Group Finance Director GBP415,000 GBP415,000
---------------- ----------------------------- ------------------- -------------------
1 Joined the Phoenix Group on 7 February 2011 and was appointed
to the Board as a Director on 28 March 2011.
2 Resigned from the Board on 21 December 2011 but remained in
the Group's employment to the end of February 2012.
Benefits received by Executive Directors comprise a car
allowance, private medical insurance, relocation assistance and
life assurance.
Pension
The Executive Directors (as at the date of this report) receive
a contribution equal to 20% of base salary to a defined
contribution pension arrangement.
Annual incentives
For 2011, annual incentive potential ('AIP') was capped at 150%
of base salary for Executive Directors. Performance targets were
based on the achievement of personal and strategic objectives for
20% of the bonus opportunity and, for the other 80%, financial
targets based on a sliding scale as follows:
% of 80% of incentive potential
Performance metric based on financial measures
------------------------------------------------------ -------------------------------
Group MCEV Operating Earnings after Tax ('GMCEVOEaT') 30%
Group Market Consistent Embedded Value ('GMCEV') 30%
Operating Companies' Cash Generation ('OCCG') 30%
Expense Management ('EM') 10%
------------------------------------------------------ -------------------------------
In addition to the above targets and in order for any incentive
payment to be paid, the Committee confirmed that it was satisfied
that management had identified and managed material business risks
in an appropriate manner.
Details of the actual incentive payments awarded in respect of
the 2011 financial year (to be paid in March 2012) are presented in
the emoluments table and notes on page 78. In summary, the AIP
corporate out--turn was 75% of maximum. The table below shows the
actual out--turn against the annual incentive maximum.
AIP earned (as a % of maximum)
---------------------------------------------------- --------
Name GMCEVOEaT GMCEV OCCG EM Personal Total Maximum
----------------- ---------- ------ ------ ----- --------- ------ --------
Clive Bannister 20.25 12.75 22.50 4.50 12.50 72.50 100%
Jonathan Yates 20.25 12.75 22.50 4.50 14.01 74.01 100%
----------------- ---------- ------ ------ ----- --------- ------ --------
For Mr C Bannister, one-third of annual incentive awards for
2011 awarded (compared with any award above target operated in
2010) 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 (unless designated as a good
leaver).
For 2012, the on--target and maximum incentive potential remains
at 75% and 150% respectively of base salary for Executive Directors
and the measures remain as set out above, but with an increase in
the weighting of the expense management target by 10% (with
corresponding 10% reduction in GMCEV), given the Board's continued
focus on expense management.
Consistent with best practice, the Committee operates a
claw--back provision which will operate for any annual incentive
amounts subsequently found to have been based on materially
inaccurate results.
Long--term incentives
The LTIP is designed to retain executives and align their
interests to the Group's long--term goals and, through those goals,
to the delivery of superior returns to shareholders. Each year,
approximately 50 participants receive contingent awards of shares
in the Group which will permit the participant to receive shares
three years after they were awarded, but only if both suitably
stretching performance conditions measured over the three--year
period are met and they remain employed (or are designated as a
good leaver).
The Committee's policy is to award Executive Directors shares
with an initial face value equal to no more than 200% of their
respective base salaries. This is below the formal plan limits of
300% of base salary or 400% in exceptional circumstances.
Consistent with the awards in May 2010, for LTIP awards granted
in April 2011, the performance measures are 50% based on MCEV
growth and 50% based on net cumulative cash generation (i.e. after
taking into account certain recurring costs), with both targets
measured over the three financial years commencing 1 January 2011
and underpinned by a debt management assessment. A summary of the
targets is set out below:
MCEV growth 25% of the MCEV related component of the award will vest
(50% of awards) for MCEV growth in excess of the risk free rate by 2.5%
per annum rising on a pro rata basis until 100% vests
for MCEV growth in excess of the risk--free rate by 6%
per annum.
---------------- ----------------------------------------------------------------
Cash generation 25% of the cash generation component of the award will
(50% of awards) vest for cumulative cash generation of GBP1.217 billion
rising on a pro rata basis until 100% vests for cash
generation of GBP1.517 billion.
---------------- ----------------------------------------------------------------
Debt underpin Notwithstanding the MCEV 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 MCEV and cash generation
performance metrics will continue to be used for the 2012 awards
(with TSR also being considered for part of the 2012 awards), with
performance targets (which will be no less challenging than those
presented above) set in advance of the awards being granted.
Shareholding guidelines
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% of salary for the Chief Executive Officer, 100% 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.
All employee share plans
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 GBP250 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 set at 15% of the market price set
at the launch of each scheme.
In addition for 2012, the Committee has approved the launch of
an HM Revenue & Customs approved Share Incentive Plan. This
offers all eligible employees, including Executive Directors, the
opportunity to purchase, out of their pre--tax salary, shares in
the Company (up to a value of GBP125 per month) and receive one
matching share for every six shares purchased.
Ignis
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 used in the rest of the
Group, but relating these to an appropriate peer group of asset
managers.
Directors' service contracts
Executive Directors
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.
Notice period from either party
Name Date of Contract (months)
------------------ ----------------- -------------------------------
Clive Bannister 7 February 2011 12
Jonathan Yates(1) 6 May 2010 12
------------------ ----------------- -------------------------------
1 Resigned from the Board on 21 December 2011.
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. Neither Director was an outside director during 2011.
Former Executive Directors
Jonathan Moss left the role of Group Chief Executive Officer on
7 February 2011 and left the Group on 29 March 2011. As reported
last year, he received a payment in lieu of notice of GBP690,000 in
aggregate, reflecting both his base salary and benefits in line
with his contractual entitlements. In addition, a contribution of
GBP857,188 was made to the Company's Employee Benefit Trust ('EBT')
subject to a recommendation that it was allocated to a sub--trust
for the benefit of Jonathan Moss' family in lieu of any annual
incentive for 2010. Jonathan Moss also received GBP50,000 by way of
compensation for loss of statutory employment rights and GBP4,800
in respect of his legal expenses and outplacement services. His
long--term incentive awards 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
112,500 Bonus Share Plan shares which, consistent with the rules,
vested on 29 March 2011.
In December 2011, the Company announced that Jonathan Yates
would leave the Group at the end of February 2012. He remained
employed throughout 2011 and his remuneration has been reported in
the normal way. For 2012, he will receive his normal salary and
benefits for the period he continued to be employed. He will not be
eligible for a bonus for any part of 2012 and will not receive any
termination payment in respect of his departure. However, the
Committee has confirmed that he will be treated as a good leaver
and therefore, will be entitled to early release, on departure, of
the 16,259 shares held under the Deferred Bonus Share Scheme (being
the deferred element of prior bonuses). He will retain his 2010 and
2011 LTIP awards which continue to vest until the normal vesting
date (with performance conditions and time pro--rating
applying).
Non--Executive Directors' contracts
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 assurance.
Unexpired term
Name Date of Letter of Appointment Appointment end date (Months)
------------------- ------------------------------ --------------------- --------------
Ian Ashken 2 September 2009 2 September 2012 5
Rene--Pierre Azria 2 September 2009 2 September 2012 5
David Barnes 2 September 2009 2 September 2012 5
Charles Clarke 18 February 2010 18 February 2013 10
Ian Cormack 2 September 2009 2 September 2012 5
Tom Cross Brown 24 September 2009 24 September 2012 6
Manjit Dale 2 September 2009 2 September 2012 5
Isabel Hudson 18 February 2010 18 February 2013 10
Alastair Lyons 29 March 2010 29 March 2013 12
Hugh Osmond 2 September 2009 2 September 2012 5
Ron Sandler 24 September 2009 24 September 2012 6
David Woods 18 February 2010 18 February 2013 10
------------------- ------------------------------ --------------------- --------------
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
Board. Fees for both the 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.
In 2011, fee levels were set at GBP450,000 for the Chairman of
the Board, GBP90,000 for the role of Non--Executive Director with
additional fees of: (i) GBP5,000 payable for the role of Senior
Independent Director; and/or (ii) GBP10,000 payable where an
individual also Chairs the Audit, Investment, Remuneration or Risk
Committee; and/or (iii) GBP20,000 payable where a Non--Executive
Director also sits on the Board of a subsidiary company.
Non--Executive Directors in place in 2011, who are not paid for
serving on subsidiary company Boards, had their fees unchanged at
GBP100,000. In addition, David Woods receives a temporary fee
(starting 1 July 2011) of GBP10,000 per annum for being a member of
the Solvency II Model Governance Committee. No changes to these fee
levels are proposed for 2012.
Audited information
Directors' emoluments
The emoluments of the Directors for 2011 were as follows:
Compensation for
Directors Annual loss Contribution Total Total
salaries/fees Benefits1 Incentive2 of office to EBT 2011 2010
Name GBP GBP GBP GBP GBP GBP GBP
------------------ ------------------ --------- ----------- ------------------ ------------ --------- ---------
Non--Executive
Chairman
Ron Sandler 450,000 - - - - 450,000 450,000
Executive
Directors
Clive Bannister3 533,050 13,057 681,954 - - 1,228,061 -
Non--Executive
Directors
Ian Ashken 100,000 - - - - 100,000 100,000
Rene--Pierre Azria 100,000 - - - - 100,000 100,000
David Barnes 110,000 - - - - 110,000 113,295
Charles Clarke4 100,000 - - - - 100,000 86,026
Ian Cormack 120,000 - - - - 120,000 120,000
Tom Cross Brown 120,000 - - - - 120,000 115,000
Manjit Dale 100,000 - - - - 100,000 100,000
Isabel Hudson(4) 100,000 - - - - 100,000 86,026
Alastair Lyons5 125,000 - - - - 125,000 82,500
Hugh Osmond 100,000 - - - - 100,000 100,000
David Woods(4) 125,000 - - - - 125,000 94,628
Former Directors
Jonathan Moss(6) 67,708 1,270 - 744,800 857,188 1,670,966 662,393
Simon Smith(7) - - - - - - 736,958
------------------ ------------------ --------- ----------- ------------------ ------------ --------- ---------
Jonathan Yates8 402,414 16,381 460,750 - - 879,545 546,230
------------------ ------------------ --------- ----------- ------------------ ------------ --------- ---------
Total 2,653,172 30,708 1,142,704 744,800 857,188 5,428,572 3,493,056
------------------ ------------------ --------- ----------- ------------------ ------------ --------- ---------
1 Benefits comprise car allowance, private medical insurance and life insurance.
2 Annual incentive amounts are presented inclusive of any
amounts which must be deferred in shares for three years (i.e.
one--third of the 2011 incentive award). Of the amounts presented
above, GBP227,318 of Clive Bannister's incentive payment will be
deferred in shares for a period of 3 years. Full details of the
number of shares under award will be disclosed in the 2012
Remuneration report.
3 Clive Bannister joined Phoenix Group on 7 February 2011 and
was appointed to the Board as a Director on 28 March 2011. The
detail shown only relates to the period from his appointment as a
Director to 31 December 2011, except for the AIP which includes the
amount earned in respect of the period 7 February 2011 to 28 March
2011.
4 Appointed to the Board on 18 February 2010.
5 Appointed to the Board on 29 March 2010.
6 Resigned from the Board on 7 February 2011.
7 Simon Smith resigned from the Board on 23 June 2010. The
details shown for 2010 only relate to the period from the 1 January
2010 to 23 June 2010.
8 Jonathan Yates resigned from the Board on 21 December
2011.
Pensions
Clive Bannister and Jonathan Yates received a Company
contribution of 20% of base salary. Jonathan Moss received a
Company contribution of 11.7% of salary (up to a maximum earnings
limit of GBP123,600) to a defined contribution pension
arrangement.
During the year to 31 December 2011, the Group has made the
following contributions to the defined contribution
arrangements:
GBP
---------------- -------
Clive Bannister 105,000
Jonathan Yates 83,000
Jonathan Moss 1,205
---------------- -------
Share--based awards
As at 31 December 2011, Directors' interests under long--term
share--based arrangements were as follows:
Share price As at 1 Jan Shares Shares Shares As at 31 Dec
Date of grant on grant 2011 granted vested lapsed 2011 Vesting date
---------------- -------------- ----------- ----------- -------- ------- ------- ------------ -------------
Clive Bannister
LTIP(3) 12 April 2011 657.5p - 212,927 - - 212,927 12 April 2014
---------------- -------------- ----------- ----------- -------- ------- ------- ------------ -------------
Jonathan Yates
LTIP(3,4) 28 May 2010 627.5p 127,490 - - - 127,490 28 May 2013
LTIP(3,4) 12 April 2011 657.5p - 126,235 - - 126,235 12 April 2014
---------------- -------------- ----------- ----------- -------- ------- ------- ------------ -------------
127,490 126,235 - - 253,725
------------------------------- ----------- ----------- -------- ------- ------- ------------ -------------
Jonathan Moss
BSP(1,5) 21 Sep 2009 842.0p 112,500 - 112,500 - - 29 Mar 2011
Phantom(2) 02 Sep 2009 818.0p 73,350 - - - 73,350 02 Sep 2012
LTIP(3,4,5) 28 May 2010 627.5p 207,171 - - - 207,171 28 May 2013
---------------- -------------- ----------- ----------- -------- ------- ------- ------------ -------------
393,021 - 112,500 - 280,521
------------------------------- ----------- ----------- -------- ------- ------- ------------ -------------
1 The Bonus Share Plan ('BSP') was introduced to reward a small
number of senior executives upon completion of the September 2009
refinancing. BSP awards vested on the second anniversary of grant,
subject to continued service. In line with the BSP rules, Jonathan
Moss' BSP awards vested in full on the termination of his
employment on 29 March 2011. No further BSP awards will be granted.
The share price at vesting was 668p.
2 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 Group
Chief Executive Officer). Awards (including those granted to
Jonathan Moss who was treated as a good leaver) 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.
3 The performance conditions for the 2010 and 2011 awards are
set out in the Remuneration policy section of this report (except
that for the 2010 grant, the cash generation targets were GBP1.375
billion rising to GBP1.655 billion). Jonathan Moss' award was
pro-rated with the 207,171 shares presented in the table reduced to
57,547 shares.
4 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.
5 On vesting, the shares awarded under the 2009 LTIP were
appointed into sub--trusts of the Phoenix Group Holdings Employee
Benefit Trust, for the benefit of Jonathan Moss' family. On vesting
the shares to be awarded under the BSP were also appointed into
this sub--trust.
Share price
Deferred Bonus Shares Date of Award Shares awarded on award Lapsed Outstanding Vesting Date
---------------------- -------------- -------------- ----------- ------ ----------- ------------
Clive Bannister - - - - - -
Jonathan Yates 6 April 2011 16,259 672.7p - 16,259 6 April 2013
---------------------- -------------- -------------- ----------- ------ ----------- ------------
Notes:
This is the arrangement pursuant to which part of the annual
incentive for any year is deferred into the Company's shares.
Sharesave
At the end of the year, the Executive Directors' Sharesave share
options were as follows:
As at 1 Jan Options Options Options Options As at 31 Dec Exercise Exercisable Date of
2011 granted vested exercised lapsed 2011 price from expiry
-------------- ----------- -------- ------- ---------- ------- ------------ -------- ------------ -----------
Clive
Bannister - 1,577 - - - 1,577 GBP5.72 01 June 2014 30 Nov 2014
-------------- ----------- -------- ------- ---------- ------- ------------ -------- ------------ -----------
Jonathan Moss 1,611 - - - 1,611 - GBP5.63 01 Mar 2013 31 Aug 2013
-------------- ----------- -------- ------- ---------- ------- ------------ -------- ------------ -----------
Jonathan Yates - - - - - - - - -
-------------- ----------- -------- ------- ---------- ------- ------------ -------- ------------ -----------
Sharesave options held by Jonathan Moss lapsed on 29 March
2011.
During the year ended 31 December 2011, the highest mid--market
price of the Company's shares was 688p and the lowest mid--market
price was 451.1p. At 31 December 2011, the Company's share price
was 525p.
Directors' interests
As at 1 January 2011 As at 31 December 2011
Name or date of appointment if later and as at 22 March 2012
------------------- -------------------------------- ------------------------
Clive Bannister - -
Jonathan Yates - -
Ian Ashken1 1,260,759 1,263,698
Rene--Pierre Azria 16,866 27,812
David Barnes 2,300 2,300
Charles Clarke 2,000 2,000
Ian Cormack - -
Tom Cross Brown 1,615 1,664
Manjit Dale2 - -
Isabel Hudson 1,587 3,249
Alastair Lyons 7,500 7,500
Hugh Osmond3 9,714,015 9,849,533
Ron Sandler 182,133 195,666
David Woods - -
Jonathan Moss 162,505 275,005
------------------- -------------------------------- ------------------------
1 Ian Ashken holds 1,113,698 shares in his own name. Tasburgh
LLC, of which Ian Ashken is a managing member, holds 150,000 shares
and is considered a connected person to Mr Ashken.
2 Manjit Dale is a director of TDR Capital Nominees Limited,
Jambright Limited and O--Re Holdings UK Limited and as such these
companies are all considered as connected persons. Total interests
held by these entities amount to 33,763,900.
3 Hugh Osmond is a director of Xercise2 Limited, Xercise Limited
and O--Re Holdings UK Limited and as such these are considered as
connected persons. Hugh Osmond has a total interest in 30,095,410
shares of which he has beneficial interest over 9,849,533.
Additional FSA Disclosures
Code Staff
The Remuneration Committee has identified the Group's asset
management subsidiary, Ignis Asset Management, as a Code firm. By
virtue of its influence over Ignis, the Committee has determined
that Phoenix Group Holdings is also a Code firm. Both companies
have been identified as Tier 4 Code firms. The Committee has
determined that 23 staff within Ignis qualify as Code Staff. The
Committee has also determined that a further 23 Group employees,
who have sufficient supervisory responsibility over Ignis'
activities, qualify as Code Staff.
Whilst not all of Phoenix Group's activities are covered by the
FSA Remuneration Code, the Committee anticipates broadly equivalent
provisions will apply, in due course, via Solvency II. The
Committee considers the FSA Code to reflect best practice and has
due regard to it across the Group.
Code Staff criteria
The following groups of employees have been identified within
the Code firms as meeting the FSA's criteria for Code Staff:
-- Certain members of the Group Board and Executive Management
Committee
-- Employees performing a Significant Influence Function in
relation to the Code firm
-- Key control function roles.
Design and structure of remuneration
The individual elements of employees' remuneration packages at
Phoenix Group comprise fixed pay (base salary, retirement and other
benefits) and performance--related pay (consisting of annual
incentives, deferred awards and long--term incentives).
Taking into account the expected value of long--term incentives,
the performance--related elements of the package make up a
significant proportion of the total remuneration of Code Staff,
while maintaining an appropriate balance between fixed and variable
elements.
Base salary and fees
All Code Staff receive either a base salary (employees) or fees
(Non--Executive Directors) to reflect their experience, skills,
competencies and contribution to the Group relative to the market
for comparable roles. Phoenix Group ensures that fixed remuneration
is sufficient to cover employees' key financial needs while
generally seeking to pay base salary around a mid--market
range.
Phoenix Group also operates a fully flexible bonus policy which
allows zero bonus payments to be made when appropriate.
Benefits
Code Staff receive benefits in line with other employees that
include pension provision, and may include car allowance, private
medical insurance and life assurance. Non--Executive Directors who
are listed as Code Staff do not receive any benefits.
Annual incentives
Rationale and eligibility criteria
All executive Code Staff are eligible to receive an annual
incentive. Annual incentives are designed to reward good financial
and non--financial performance that supports the business strategy,
taking into account the Group's risk appetite and personal
contribution.
Non--executive Code Staff are not eligible to receive annual
incentives.
Performance measurement/assessment
For Group and life company employees, performance assessment is
normally based upon a balanced scorecard of measures related to
Group and/or life company and individual targets. These targets
typically include financial performance, risk, people and customer
measures. Overall bonus costs are reviewed by the Committee at the
year end having regard to the Group KPIs and non--financial
measures.
Ignis employees' bonuses are financed from a defined profit pool
(subject to discretion being reserved to the Committee to adjust
the percentage available). Distribution of the pool has due regard
to objectives similar to those in the Group and life companies.
For senior staff in control functions (Internal Audit,
Regulatory Compliance and Risk) reward will, from 1 January 2012,
be linked to individual achievement against personal objectives and
will exclude any direct link to financial performance.
In each case, target levels of individual reward have regard to
market levels for comparable roles internally and externally.
All incentive awards to Code Staff are subject to the review and
support of the Committee.
Deferral and vesting
The Committee requires that one-third of annual incentives
awarded to the Group's senior employees are deferred into Phoenix
Group Holdings shares. Equivalent rules apply to Ignis employees
who are required to defer part of their bonus into phantom shares
where the value of the outcome is determined by Ignis' financial
performance.
These deferral arrangements extend to the majority of Code
Staff.
Long--term incentives
Group
To encourage the creation of value over the long--term and to
align the rewards of the participants with the returns to
shareholders, the Group provides employees in senior roles
(executive level and selected senior management) the opportunity to
receive annual awards of long--term incentives. Details of the LTIP
are given on page 75 of this report.
Ignis
Selected employees are eligible to receive awards subject to the
rules of the Ignis Long--Term Phantom Option Plan ('LTOP'). Awards
may be made annually but are typically one--off in nature and
reward the growth in the notional value of Ignis over a six year
period (with one--third of the award vesting on the fourth, fifth
and sixth anniversaries of the grant date). Awards take the form of
a cash settled option. Awards with a grant date of 2010 reward
growth over an initial value of GBP1 per notional share, whilst
awards granted in respect of 2011 reward growth over an initial
value of GBP1.15 per notional share. The value per notional share
at the end of the year was GBP1.16. Where it has been necessary and
as a part of the recruitment process, the Committee has provided an
underpin to the value of the award to reflect the value forfeited
by employees due to leaving previous employers.
Risk adjustment
To manage the risk aspects of the remuneration policy, the
Committee considers the performance of the Group and individual
businesses against risk objectives in determining the bonus pool
and requires the Chief Risk Officer to report to the Committee on
this.
Quantitative Remuneration Disclosure
The Group is required to disclose aggregate quantitative
remuneration information for Code Staff.
There were 23 Code Staff that have been classified as Group and
23 as Ignis. Aggregate remuneration expenditure is broken down as
follows:
Number of staff GBPm
----------------------- --------------- -----
Non-executive Director 17 4.18
Senior Management 9 14.33
Other 20 12.38
----------------------- --------------- -----
Total 46 30.89
----------------------- --------------- -----
Number of staff GBPm
------ --------------- -----
Ignis 23 18.30
Group 23 12.59
------ --------------- -----
Total 46 30.89
------ --------------- -----
Approval
This report in its entirety has been approved by the Committee
and the Board of Directors and signed on its behalf by
Ian Cormack
Remuneration Committee Chairman
22 March 2012
IFRS financial statements
The IFRS operating profit of GBP387 million reflects a strong
performance from both the Group's operating segments.
In this section
84 Statement of Directors' responsibilities
85 Independent Auditors' report
86 Consolidated IFRS financial statements
93 Notes to the consolidated financial statements
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Board Responsibility Statement according to section 5:25c(2)(c)
of the Dutch Financial Markets Supervision Act.(1)
The Board of Directors of Phoenix Group Holdings hereby declares
that, to the best of its knowledge:
1. The IFRS financial statements for the year ended 31 December
2011 give a true and fair view of the assets, liabilities,
financial position and results of Phoenix Group Holdings and its
consolidated subsidiaries taken as a whole;
2. The Annual Report gives a true and fair view of the state of
affairs of Phoenix Group Holdings and its consolidated subsidiaries
as at 31 December 2011 and their development in the financial year
to which the Annual Report and Accounts relate; and
3. The Annual Report describes the principal risks facing Phoenix Group Holdings.
Clive Bannister Alastair Lyons
Group Chief Executive Officer Audit Committee Chairman
St Helier, Jersey
22 March 2012
1 The Company's home member state is the Netherlands as a result
of its original listing on Euronext Amsterdam and is therefore
governed by the Dutch Financial Markets Supervision Act.
Independent auditor's report
To: The Meeting of Shareholders of Phoenix Group Holdings
Report on the consolidated financial statements
We have audited the accompanying consolidated financial
statements 2011 of Phoenix Group Holdings, Cayman Islands, and its
subsidiaries (the 'Group'), which comprise the statement of
consolidated financial position as at 31 December 2011, the
consolidated income statement, the statement of consolidated
comprehensive income, the pro forma reconciliation of Group
operating profit to result attributable to owners, 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.
Directors' responsibility
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
Dutch Civil Code, and for the preparation of the Directors' Report
in accordance with Part 9 of Book 2 of the Dutch 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.
Auditor's responsibility
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 the Dutch
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
Group'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.
Opinion with respect to the consolidated financial
statements
In our opinion, the consolidated financial statements give a
true and fair view of the financial position of the Group as at 31
December 2011, 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 Dutch Civil Code.
Report on other legal and regulatory requirements
Directors' Report in accordance with Dutch Civil Code
Pursuant to the legal requirement under section 2:393 sub 5 at e
and f of the Dutch 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 Dutch Civil Code.
Requirements of the Listing Rules
We have nothing to report in respect of the following items that
we are required to review under the Listing Rules:
-- the Directors' statement, set out on page 62, in relation to
going concern;
-- the part of the Corporate Governance Statement relating to
the Company's compliance with the nine provisions of the UK
Corporate Governance Code specified for our review; and
-- certain elements of the report to shareholders by the Board
on directors' remuneration.
Matters on which we report by exception because of voluntary
compliance with the UK Companies Act 2006
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:
-- adequate accounting records have not been kept by the Group,
or returns adequate for our audit have not been received from
branches not visited by us; or
-- the Directors' Remuneration report to be audited is not in
agreement with the accounting records and returns; or
-- certain disclosures of Directors' remuneration specified by
law are not made; or
-- we have not received all the information and explanations we
require for our audit;
The Hague, 22 March 2012
Ernst & Young Accountants LLP
was signed by S. B. Spiessens
consolidated income statement
For the year ended 31 December 2011
2011 2010
Notes GBPm GBPm
-------------------------------------------------------------- ----- ------- -------
Gross premiums written 1,473 1,534
Less: premiums ceded to reinsurers (85) (85)
============================================================== ===== ======= =======
Net premiums written 1,388 1,449
Fees 6 170 162
Net investment income 7 4,920 5,907
-------------------------------------------------------------- ----- ------- -------
Total revenue, net of reinsurance payable 6,478 7,518
Other operating income 8 12 25
-------------------------------------------------------------- ----- ------- -------
Net income 6,490 7,543
-------------------------------------------------------------- ----- ------- -------
Policyholder claims (4,968) (5,260)
Less: reinsurance recoveries 224 210
Change in insurance contract liabilities (1,338) (252)
Change in reinsurers' share of insurance contract liabilities 222 89
Transfer from/(to) unallocated surplus 21 16 (143)
-------------------------------------------------------------- ----- ------- -------
Net policyholder claims and benefits incurred (5,844) (5,356)
Change in investment contract liabilities 260 (964)
Acquisition costs 9 (13) (12)
Change in present value of future profits 33 (19) 7
Amortisation of acquired in--force business 33 (134) (147)
Amortisation of customer relationships 33 (18) (18)
Administrative expenses 10 (606) (676)
Net income/(expense) attributable to unitholders 131 (97)
-------------------------------------------------------------- ----- ------- -------
Total operating expenses (6,243) (7,263)
-------------------------------------------------------------- ----- ------- -------
Profit before finance costs and tax 247 280
Finance costs 12 (251) (269)
-------------------------------------------------------------- ----- ------- -------
(Loss)/profit for the year before tax (4) 11
-------------------------------------------------------------- ----- ------- -------
Tax attributable to policyholders' returns 13 (173) (5)
-------------------------------------------------------------- ----- ------- -------
(Loss)/profit before the tax attributable to owners (177) 6
Tax (charge)/credit 13 (94) 69
Add: tax attributable to policyholders' returns 13 173 5
-------------------------------------------------------------- ----- ------- -------
Tax credit attributable to owners 13 79 74
-------------------------------------------------------------- ----- ------- -------
(Loss)/profit for the year attributable to owners (98) 80
-------------------------------------------------------------- ----- ------- -------
Attributable to:
Owners of the parent (131) 30
Non--controlling interests 19 33 50
-------------------------------------------------------------- ----- ------- -------
(98) 80
-------------------------------------------------------------- ----- ------- -------
Earnings per ordinary share
Basic and diluted earnings per ordinary share 15 (76.2p) 20.1p
-------------------------------------------------------------- ----- ------- -------
STATEMENT OF CONSOLIDATED
COMPREHENSIVE INCOME
For the year ended 31 December 2011
2011 2010
Notes GBPm GBPm
------------------------------------------------------------------------------------------------- ----- ----- -----
(Loss)/profit for the year (98) 80
Other comprehensive income:
Actuarial gains of defined benefit pension schemes 32 251 45
Contribution in respect of actuarial losses of defined benefit pension scheme by the with--profit
funds 32 - 27
------------------------------------------------------------------------------------------------- ----- ----- -----
251 72
Tax credit on actuarial gains of defined benefit pension schemes 13 1 4
------------------------------------------------------------------------------------------------- ----- ----- -----
252 76
Total comprehensive income for the year 154 156
------------------------------------------------------------------------------------------------- ----- ----- -----
Attributable to:
Owners of the parent 121 106
Non--controlling interests 33 50
------------------------------------------------------------------------------------------------- ----- ----- -----
154 156
------------------------------------------------------------------------------------------------- ----- ----- -----
Pro forma reconciliation of Group operating profit to result
attributable to owners
For the year ended 31 December 2011
2011 2010
Notes GBPm GBPm
----------------------------------------------------------------------------------- ----- ----- -----
Operating profit
Phoenix Life 395 388
Ignis Asset Management 46 46
----------------------------------------------------------------------------------- ----- ----- -----
441 434
Group costs (54) (61)
----------------------------------------------------------------------------------- ----- ----- -----
Total operating profit before adjusting items 387 373
Investment return variances and economic assumption changes on long--term business 5 (338) 18
Variance on owners' funds 5 9 19
Amortisation of acquired in--force business (121) (132)
Amortisation of customer relationships (18) (18)
Non--recurring items 4.2 14 (139)
----------------------------------------------------------------------------------- ----- ----- -----
(Loss)/profit before finance costs attributable to owners (67) 121
Finance costs attributable to owners (110) (115)
----------------------------------------------------------------------------------- ----- ----- -----
(Loss)/profit before the tax attributable to owners 4.2 (177) 6
Tax credit attributable to owners 79 74
----------------------------------------------------------------------------------- ----- ----- -----
(Loss)/profit for the year attributable to owners (98) 80
----------------------------------------------------------------------------------- ----- ----- -----
StATEMENT OF CONSOLIDATed financial position
As at 31 December 2011
2010
2011 Restated
Notes GBPm GBPm
------------------------------------------------------ ----- ------ ---------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 16 - -
Share premium 1,054 1,109
Other reserves 5 5
Shares held by employee trust and Group entities 17 (11) (13)
Foreign currency translation reserve 93 93
Retained earnings 511 386
Total equity attributable to owners of the parent 1,652 1,580
Non--controlling interests 19 714 720
Total equity 2,366 2,300
------------------------------------------------------ ----- ------ ---------
Liabilities
Pension scheme deficit 32 - 77
Insurance contract liabilities
Liabilities under insurance contracts 20 51,800 50,479
Unallocated surplus 21 848 864
52,648 51,343
Financial liabilities
Investment contracts 7,978 8,849
Borrowings 22 3,152 4,028
Deposits received from reinsurers 23 472 419
Derivatives 24 4,292 2,431
Net asset value attributable to unit holders 3,209 1,937
Obligations for repayment of collateral received 25 13,005 10,160
26 32,108 27,824
Provisions 27 59 73
Deferred tax 28 673 607
Reinsurance payables 33 25
Payables related to direct insurance contracts 29 707 713
Current tax 28 105 99
Accruals and deferred income 30 175 214
Other payables 31 627 327
Total liabilities 87,135 81,302
------------------------------------------------------ ----- ------ ---------
Total equity and liabilities 89,501 83,602
------------------------------------------------------ ----- ------ ---------
2010
2011 Restated
Notes GBPm GBPm
--------------------------------------------------------- ----- ------ ---------
ASSETS
Pension scheme surplus 32 314 59
Intangible assets
Goodwill 115 115
Acquired in--force business 1,882 2,016
Customer relationships 402 420
Present value of future profits 23 42
33 2,422 2,593
Property, plant and equipment 34 28 34
Investment property 35 1,816 1,732
Financial assets
Loans and receivables 3,529 2,293
Derivatives 24 6,099 3,197
Equities 11,078 12,460
Fixed and variable rate income securities 42,010 40,899
Collective investment schemes 6,251 7,144
36 68,967 65,993
Insurance assets
Reinsurers' share of insurance contract liabilities 20 3,153 2,939
Reinsurance receivables 257 263
Insurance contract receivables 14 19
3,424 3,221
Current tax 28 8 5
Prepayments and accrued income 599 603
Other receivables 39 200 174
Cash and cash equivalents 40 11,723 9,188
Total assets 89,501 83,602
--------------------------------------------------------- ----- ------ ---------
Statement of consolidated cash flows
For the year ended 31 December 2010
2011 2010
Notes GBPm GBPm
--------------------------------------------------------------------------- ----- ------- -----
Cash flows from operating activities
Cash generated by operations 41 3,692 3,392
Taxation (paid)/recovered (16) 3
Net cash flows from operating activities 3,676 3,395
Cash flows from investing activities
Purchase of property, plant and equipment (7) (3)
Net cash flows from investing activities (7) (3)
Cash flows from financing activities
Gross proceeds from issue of share capital - 33
Proceeds from issuing shares in subsidiaries to non--controlling interests 1 96
Partial buy back of non--controlling interests - (4)
Proceeds of new policyholder borrowings 98 -
Ordinary share dividends paid (55) (43)
Coupon on Perpetual Reset Capital Securities paid (26) (62)
Dividends paid to non--controlling interests (21) (18)
Repayment of policyholder borrowings (825) (38)
Repayment of shareholder borrowings (174) (127)
Interest paid on policyholder borrowings (21) (12)
Interest paid on shareholder borrowings (111) (110)
Net cash flows from financing activities (1,134) (285)
Net increase in cash and cash equivalents 2,535 3,107
Cash and cash equivalents at the beginning of the year 9,188 6,081
--------------------------------------------------------------------------- ----- ------- -----
Cash and cash equivalents at the end of the year 40 11,723 9,188
--------------------------------------------------------------------------- ----- ------- -----
STATEMENT OF CONSOLIDATED CHANGES In EQUITY
For the year ended 31 December 2011
Shares
held by
the
employee
trust and Foreign Non-
Share group currency controlling
capital Share Other entities translation Retained interests
(note 16) premium reserves (note 17) reserve earnings Total (note 19) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
At 1 January 2011 - 1,109 5 (13) 93 386 1,580 720 2,300
(Loss)/profit for
the year - - - - - (131) (131) 33 (98)
Other
comprehensive
income for the
year - - - - - 252 252 - 252
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
Total
comprehensive
income for the
year - - - - - 121 121 33 154
Dividends paid on
ordinary shares - (72) - - - - (72) - (72)
Dividends paid to
non--controlling
interests - - - - - - - (21) (21)
Coupon paid to
non--controlling
interests, net
of tax relief - - - - - - - (19) (19)
Shares issued in
lieu of
dividends - 17 - - - - 17 - 17
Credit to equity
for
equity--settled
share--based
payment - - - - - 6 6 - 6
Shares in
subsidiaries
subscribed for
by
non--controlling
interests - - - - - - - 1 1
Shares
distributed by
employee trust - - - 2 - (2) - - -
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
At 31 December
2011 - 1,054 5 (11) 93 511 1,652 714 2,366
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
STATEMENT OF CONSOLIDATED CHANGES In EQUITY
For the year ended 31 December 2010
Shares
held by
the
employee
trust and Foreign Non-
Share group currency controlling
capital Share Other entities translation Retained interests
(note 16) premium reserves (note 17) reserve earnings Total (note 19) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
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 - 230 (230) (3) - - (3) - (3)
Credit to equity
for
equity--settled
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
----------------- ---------- ----------- ---------- ---------- ----------- ---------- ----- ----------- -----
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 comprise 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,
namely the Pearl Facility and the Impala Facility (note 22).
Notes to the consolidated
financial statements
1. Accounting policies
(a) Basis of preparation
The consolidated financial statements for the year ended 31
December 2011 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
discretionary participation features ('DPF') that have been
measured at fair value.
Statement of compliance
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 Dutch Civil Code.
The financial statements are presented in sterling (GBP) rounded
to the nearest million except where otherwise stated.
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.
Basis of consolidation
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.
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 share of net assets
attributed to the non--controlling interest holder, adjusted for
the relevant share of subsequent changes in equity.
(b) Critical accounting estimates and judgements
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and
liabilities, income and expenses. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of the judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
Critical accounting estimates are those which involve the most
complex or subjective judgements or assessments. The areas of the
Group's business that typically require such estimates are
insurance and investment contract liabilities, determination of the
fair value of financial assets and liabilities, impairment tests
for intangible assets, income taxes and pension benefit assets and
liabilities.
Insurance and investment contract liabilities
Insurance and investment contract liability accounting is
discussed in more detail in accounting policies (e) and (f) with
further detail of the key assumptions made in determining insurance
and investment contract liabilities included in note 43.
Fair value of financial assets and liabilities
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. 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.
Further details of the estimates made are included in note 37.
Impairment of intangible assets
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. Further details
of estimates made are included in note 33.
Income taxes
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) is discussed in more detail in accounting policy (l).
Pension benefit assets and liabilities
The valuation of pension benefit assets and liabilities is
determined using actuarial valuations using a number of
assumptions. 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.
(c) Foreign currency transactions
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:
-- assets and liabilities are translated at the closing rate at
the period end;
-- income, expenses and cash flows denominated in foreign
currencies are translated at average exchange rates; and
-- all resulting exchange differences are recognised through the
statement of consolidated comprehensive income.
Foreign currency transactions are translated into the functional
currency of the transacting Group entity using exchange rates
prevailing 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.
(d) Classification of contracts
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 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.
(e) Insurance contracts and investment contracts with DPF
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.
Insurance liabilities
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:
-- where there are no guaranteed surrender values; or
-- in the periods where guaranteed surrender values do not apply
even though guaranteed surrender values are applicable after a
specified period of time.
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:
-- liabilities to policyholders arising from the with--profit
business are stated at the amount of the realistic value of the
liabilities, adjusted to exclude the owners' share of projected
future bonuses;
-- acquisition costs are not deferred; and
-- reinsurance recoveries are measured on a basis that is
consistent with the valuation of the liability to policyholders to
which the reinsurance applies.
The principal assumptions are given in note 43.
Present value of future profits on non--participating business
in the with--profit funds
For UK with--profit life funds falling within the scope of the
FSA realistic capital regime, and hence FRS 27, an amount may be
recognised for the 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. This 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
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.
Liability adequacy
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.
Unallocated surplus
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 this
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.
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 GBPnil.
(f) Investment contracts without DPF
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
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.
(g) Financial liabilities
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:
-- it eliminates or significantly reduces accounting mismatches
that would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases; or
-- a group of financial assets, financial liabilities or both is
managed and its performance is evaluated and managed on a fair
value basis, in accordance with a documented risk management or
investment strategy, and information about the Group is provided
internally on that basis to the Group's key management
personnel.
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 meet the definition of equity--settled
share--based payments, in which case they are recognised as
equity.
(h) Borrowings
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.
(i) Deposits from reinsurers
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.
(j) Net asset value attributable to unitholders
The net asset value attributable to unitholders represents the
non--controlling interest in collective investment schemes which
are consolidated by the Group. 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.
(k) Obligations for repayment of collateral received
It is the Group's practice to obtain collateral in stock lending
and derivative 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.
(l) Income tax
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.
(m) Employee benefits
Defined contribution pension plans
Obligations for contributions to defined contribution pension
plans are recognised as an expense in the consolidated income
statement as incurred.
Defined benefit pension schemes
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 with--profit 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.
(n) Intangible assets
Goodwill
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 less than the
carrying value.
Acquired in--force business
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.
Customer relationships
Intangible assets include vesting pension premiums and
investment management contracts as detailed in note 33. These are
measured on initial recognition at cost. The cost of intangible
assets acquired in a business combination is their fair value as at
the date of acquisition. Following initial recognition, intangible
assets are carried at cost less any accumulated amortisation and
any accumulated impairment losses. Internally generated intangible
assets are not capitalised and expenditure is reflected in the
consolidated income statement in the year in which the expenditure
is incurred.
Intangible assets with finite lives are amortised on a
straight--line basis over their useful economic lives and assessed
for impairment whenever there is an indication that the recoverable
amount 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.
(o) Property, plant and equipment
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.
(p) Investment property
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.
(q) Investments in associates and joint ventures
Investments in associates and joint ventures that are held for
investment purposes are accounted for under IAS 39 Financial
Instruments: Recognition and Measurement. 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.
(r) Financial assets
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
derivative assets 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 this is reflective of
the manner in which they are managed and the risks are
evaluated.
Impairment of financial assets
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. 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.
Fair value estimation
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 applicable 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 determined 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.
Stock lending
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.
Collateral
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.
(s) Reinsurance
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 is
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 period. 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 recognised 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.
(t) Cash and cash equivalents
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.
(u) Provisions and contingent liabilities
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.
(v) Earnings per share
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 in issue during the
year.
For the diluted earnings per share, the weighted average number
of ordinary shares in issue is adjusted to assume conversion of all
potentially dilutive ordinary shares, including warrants and
potentially issuable ordinary shares.
(w) Dividends
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 the 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.
(x) Income recognition
Gross premiums
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.
Reinsurance premiums
Outward reinsurance premiums are accounted for on a payable
basis.
Fee and commission income
Fee and commission income relates to the following:
-- fund management based fees, which are recognised as the
services are provided;
-- investment contract income - investment contract
policyholders are charged for policy administration services,
investment management services, surrenders and other contract fees.
These fees are recognised as revenue over the period in which the
related services are performed. If the fees are for services
provided in future periods, then they are deferred and recognised
over those periods. 'Front end' fees are charged on some
non--participating investment contracts. Where the
non--participating investment contract is measured at fair value,
such fees which relate to the provision of investment management
services are deferred and recognised as the services are provided;
and
-- other fees, which are recognised as the services are
provided.
Net investment income
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
Other operating income comprises the general business result and
other non--investment income which is recognised on an accruals
basis.
(y) Benefits, claims and expenses recognition
Gross benefits and claims
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
Reinsurance claims are recognised when the related gross
insurance claim is recognised according to the terms of the
relevant contract.
Share--based payments
Equity--settled share--based payments to employees and others
providing services are measured at the fair value of the equity
instruments at the grant date. The fair value excludes the effect
of non--market--based vesting conditions. Details regarding the
determination of the fair value of equity--settled share--based
transactions are set out in note 18.
The fair value determined at the grant date of the
equity--settled share--based payments is expensed on a
straight--line basis over the vesting period, based on the Group's
estimate of equity instruments that will eventually vest. At each
period end, the Group revises its estimate of the number of equity
instruments expected to vest as a result of the effect of
non--market--based vesting conditions. The impact of the revision
of the original estimates, if any, is recognised in the
consolidated income statement such that the cumulative expense
reflects the revised estimate with a corresponding adjustment to
equity.
Where the terms and conditions of warrants are modified before
they vest, the increase in the fair value of the warrants, measured
immediately before and after the modification, is also charged to
the consolidated income statement over the remaining vesting
period.
Finance costs
Interest payable is recognised in the consolidated income
statement as it accrues and is calculated using the effective
interest method.
(z) Share capital and shares held by the employee trust and
Group entities
Ordinary share capital
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.
Shares held by the employee trust and Group entities
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.
(aa) General business
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.
(bb) Segmental reporting
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.
(cc) Events after the reporting period
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.
2. Financial information
The consolidated financial statements for the year ended 31
December 2011, set out on pages 84 to 164, were authorised on 22
March 2012 by the Board of Directors for issue.
In preparing the financial statements the Group has adopted the
following standards, interpretations and amendments which have been
issued by the International Accounting Standards Board ('IASB') and
have been adopted for use by the EU. None of these have a material
effect on the results of the Group.
-- IAS 32 Financial Instruments Presentation (Amendment). The
amendment alters the definition of a financial liability in IAS 32
to enable entities to classify rights issues and certain options or
warrants as equity instruments.
-- IFRIC 14 Prepayments of a Minimum Funding Requirement
(Amendment). The amendment permits a prepayment of future service
costs in accordance with a minimum funding requirement to be
recognised as a pension asset.
-- IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments. This addresses the accounting by an entity when the
terms of a financial liability are renegotiated and result in its
equity instruments being issued to extinguish all or part of the
financial liability.
-- Annual improvements 2010. This makes a number of minor
improvements to existing standards and interpretations.
The IASB 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 on the Group of adopting them is subject to
evaluation:
-- IFRS 9 Financial Instruments (2015). This is the first two
parts of a replacements standard for IAS 39 Financial Instruments:
Recognition and Measurement and deals with the classification and
measurement of financial assets and financial liabilities,
including some hybrid contracts.
-- Deferred tax: Recovery of Underlying Assets (Amendments to
IAS 12) (2012). This provides a practical approach to the
measurement of deferred tax liabilities and assets when investment
property is measured at fair value, according to whether the entity
expects to recover an asset by using or selling it.
-- Disclosure - Transfer of Financial Assets (Amendments to IFRS
7) (2012). This revises the required disclosures to help users of
financial statements evaluate the risk exposures relating to
transfers of financial assets and the effect of those risks on an
entity's financial position.
-- IFRS 11 Joint Arrangements (2013) establishes principles for
financial reporting by parties to a joint arrangement.
-- IFRS 12 Disclosure of Interests in Other Entities (2013)
combines, enhances and replaces the disclosure requirements for
subsidiaries, joint arrangements, associates and unconsolidated
structured entities.
-- IFRS 13 Fair Value Measurement (2013) defines fair value and
sets out in a single IFRS a framework for measuring fair value.
-- Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) (2013). The amendment requires companies to
group together items within other comprehensive income that may be
reclassified to the profit or loss section of the income
statement.
-- IAS 19 Employee Benefits (Amendment) (2013). The IASB has
issued numerous amendments to IAS 19. These range from fundamental
changes such as removing the corridor mechanism and the concept of
expected returns on plan assets to simple clarifications and
re--wording.
-- IAS 28 Investments in Associates and Joint Ventures (Revised)
(2013). This standard supersedes IAS 28 Investments in Associates
and prescribes the accounting for investments in associates and
sets out the requirements for the application of the equity method
when accounting for investments in associates and joint
ventures.
-- Disclosures - Offsetting Financial Assets and Financial
Liabilities (Amendments to IFRS 7) (2013). The new disclosure
requirements are intended to help users of financial statements
better assess the effect or potential effect of offsetting
arrangements on an entity's financial position.
-- Offsetting Financial Assets and Financial Liabilities
(Amendments to IAS 32) (2014). The amendments address
inconsistencies in current practice when applying the offsetting
criteria in IAS 32.
In addition, the following standards, interpretations and
amendments have been issued but are not currently relevant to the
Group:
-- Severe Hyperinflation and Removal of Fixed Dates for
First--time Adopters (Amendments to IFRS 1) (2012).
-- IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine (2013).
-- IAS 27 Separate Financial Statements (Revised) (2013).
3. Prior period adjustment
During the Group's review of the recoverability of its deferred
tax assets, it was identified that a deferred tax asset of GBP38
million should have been written off at the date of, and as a
consequence of, the 2009 acquisition of the then Pearl businesses
by the Company. The consequence of this is a prior year
understatement of deferred tax liabilities and goodwill of GBP38
million. The impact of the correction on the prior year statement
of consolidated financial position is to increase goodwill and
deferred tax liabilities by GBP38 million. The correction of this
classification error has no impact on operating profit, profit
attributable to owners, retained earnings or net assets. A
statement of consolidated financial position as at 31 December 2009
has not been presented as it would not add any further clarity to
the information presented above.
4. Segmental analysis
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 operating
segments as follows:
-- Phoenix Life - this segment manages a range of whole life,
term assurance and pension products; and
-- Ignis Asset Management - this segment provides investment
management services to the life companies within the Group and to
third parties, covering both retail and institutional
investors.
Segment performance is evaluated based on profit or loss which,
in certain respects, is presented 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 external to the
Group amounts to greater than 10% of the Group's revenue.
4.1 Segmental result
2011
Ignis Asset Management Unallocated group Total
Phoenix Life GBPm GBPm GBPm Eliminations GBPm GBPm
========================= ================= ========================= ================= ================= =======
Net premiums written
from:
External customers 1,388 - - - 1,388
Other segment - - - - -
========================= ================= ========================= ================= ================= =======
1,388 - - - 1,388
Fees from:
External customers 94 76 - - 170
Other segment - 69 - (69) -
========================= ================= ========================= ================= ================= =======
94 145 - (69) 170
Net investment income:
Recurring 4,911 1 8 - 4,920
Offset interest income
on interest swaps
against interest
expenses(1) - - (19) - (19)
========================= ================= ========================= ================= ================= =======
4,911 1 (11) - 4,901
Other operating income:
Recurring 12 - - - 12
========================= ================= ========================= ================= ================= =======
Net income 6,405 146 (11) (69) 6,471
========================= ================= ========================= ================= ================= =======
Net policyholder claims
and benefits incurred:
Recurring (5,879) - - - (5,879)
Non--recurring 35 - - - 35
========================= ================= ========================= ================= ================= =======
(5,844) - - - (5,844)
Depreciation, impairment
and amortisation:
Depreciation of
property, plant and
equipment - (3) - - (3)
Impairment losses on
property, plant and
equipment (8) - - - (8)
Amortisation of
acquired in--force
business (134) - - - (134)
Amortisation of
customer
relationships (13) (5) - - (18)
========================= ================= ========================= ================= ================= =======
(155) (8) - - (163)
Other operating expenses:
Recurring (136) (97) (51) 69 (215)
Non--recurring (50) (2) 31 - (21)
========================= ================= ========================= ================= ================= =======
(186) (99) (20) 69 (236)
Total operating expense (6,185) (107) (20) 69 (6,243)
Profit/(loss) before
finance costs and tax 220 39 (31) - 228
Finance costs (122) - (129) - (251)
Offset interest income
on interest swaps
against interest
expense(1) - - 19 - 19
========================= ================= ========================= ================= ================= =======
(122) - (110) - (232)
Profit/(loss) before tax 98 39 (141) - (4)
Tax attributable to
policyholders' returns (173) - - - (173)
========================= ================= ========================= ================= ================= =======
Segmental result before
the tax attributable to
owners (75) 39 (141) - (177)
------------------------- ----------------- ------------------------- ----------------- ----------------- -------
1 The Group has entered into derivatives to protect its net
exposure to interest rate fluctuations and this reallocation
reflects the net economic interest exposure of the Group.
2010
Unallocated group Eliminations Total
Phoenix Life GBPm Ignis Asset Management GBPm GBPm GBPm GBPm
---------------------------- ----------------- --------------------------- ----------------- ------------ -------
Net premiums written from:
External customers 1,449 - - - 1,449
Other segment - - - - -
---------------------------- ----------------- --------------------------- ----------------- ------------ -------
1,449 - - - 1,449
Fees from:
External customers 100 62 - - 162
Other segment - 82 - (82) -
---------------------------- ----------------- --------------------------- ----------------- ------------ -------
100 144 - (82) 162
Net investment income:
Recurring 5,877 - 35 - 5,912
Offset interest income
on interest swaps
against interest
expenses2 - - (53) - (53)
Non--recurring (5) - - - (5)
---------------------------- ----------------- --------------------------- ----------------- ------------ -------
5,872 - (18) - 5,854
Other operating income:
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(2) - - 53 - 53
---------------------------- ----------------- --------------------------- ----------------- ------------ -------
(101) - (115) - (216)
Profit/(loss) 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
============================ ================= =========================== ================= ============ =======
2 The Group has entered into derivatives to protect its net
exposure to interest rate fluctuations and this reallocation
reflects the net economic interest exposure of the Group.
4.2 Reconciliation of operating profit/(loss) before adjusting
items to the segmental result
2011
Phoenix
Life Unallocated Group Total
GBPm Ignis Asset Management GBPm GBPm GBPm
------------------------------------------------------ ------- --------------------------- ----------------- -----
Operating profit/(loss) before adjusting items 395 46 (54) 387
Investment return variances and economic assumption
changes on long--term business (338) - - (338)
Variance on owners' funds 17 - (8) 9
Amortisation of acquired in--force business (121) - - (121)
Amortisation of customer relationships (13) (5) - (18)
Non--recurring items (15) (2) 31 14
Financing costs attributable to owners - - (110) (110)
------------------------------------------------------ ------- --------------------------- ----------------- -----
Segment result before the tax attributable to owners (75) 39 (141) (177)
------------------------------------------------------ ------- --------------------------- ----------------- -----
Non--recurring items include:
-- restructuring costs of GBP37 million;
-- regulatory change and systems transformation costs of GBP21
million;
-- a gain of GBP37 million arising from closing the Group's
pension schemes to future accrual and implementing a pension
increase exchange programme; and
-- a GBP35 million recovery of historic costs under the
management services agreements with the life division.
2010
Phoenix
Life Unallocated Group Total
GBPm Ignis Asset Management GBPm GBPm GBPm
------------------------------------------------------ ------- --------------------------- ----------------- -----
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:
-- premium listing and other restructuring costs, including site
rationalisation and outsourcer transformation, of GBP80
million;
-- regulatory change and systems transformation costs of GBP36
million; and
-- an increase in the expense reserves of Phoenix Life of GBP23
million following the new fee arrangement between Phoenix Life and
Ignis Asset Management. Ignis Asset Management will recognise the
benefit of this new arrangement as it is earned and so this charge
will reverse over time.
4.3 Segmental total assets and total liabilities
Assets Liabilities
Assets Liabilities restated restated
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------- ------ ----------- --------- -----------
Phoenix Life 88,848 83,967 83,187 78,158
Ignis Asset Management 339 95 356 128
Unallocated Group 314 3,073 59 3,016
----------------------- ------ ----------- --------- -----------
89,501 87,135 83,602 81,302
----------------------- ------ ----------- --------- -----------
5. Investment return variances and economic assumption
changes
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.
5.1 Life assurance business
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 reflect the
impact of the increase in credit spreads on corporate bonds and
movements in equities, properties and yields.
5.2 Owners' funds
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:
2011 2010
GBPm GBPm
------------------------------- ----- -----
Variances on owners' funds of:
Subsidiary undertakings 7 7
The Company 2 12
------------------------------- ----- -----
9 19
------------------------------- ----- -----
The variances on owners' funds of the Company comprise fair
value gains arising from movements in the fair value of warrants in
issue over the Company's shares.
5.3 Calculation of the long--term investment return
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:
2011 2010
% %
---------------------------------------------- ---- ----
Equities 7.1 7.6
Properties 6.1 6.6
Gilts (15 year gilt) 4.0 4.5
Other fixed interest (15 year gilt plus 0.6%) 4.6 5.1
---------------------------------------------- ---- ----
6. Fees
2011 2010
GBPm GBPm
--------------------------- ----- -----
Fund management based fees 75 62
Investment contract income 95 100
--------------------------- ----- -----
170 162
--------------------------- ----- -----
7. Net investment income
2011 2010
GBPm GBPm
---------------------------------------------------------------------------------------------------- ----- -----
Investment income
Interest income on loans and receivables 49 57
Interest income on impaired financial assets 7 5
Interest income on financial assets designated at fair value through profit or loss on initial
recognition 2,554 1,911
Dividend income 679 492
Rental income 86 78
Net expected return on pension assets (11) (18)
---------------------------------------------------------------------------------------------------- ----- -----
3,364 2,525
---------------------------------------------------------------------------------------------------- ----- -----
Impairment losses on loans and receivables (3) (12)
Fair value gains/(losses)
Financial assets at fair value through profit or loss
Held for trading - derivatives 960 (17)
Designated upon initial recognition 595 3,324
Investment property 4 87
---------------------------------------------------------------------------------------------------- ----- -----
1,556 3,382
---------------------------------------------------------------------------------------------------- ----- -----
Net investment income 4,920 5,907
---------------------------------------------------------------------------------------------------- ----- -----
8. Other operating income
2011 2010
GBPm GBPm
---------------------------------------------------------- ----- -----
General business result 2 -
Income received from outsourcer - 14
Income under Royal London transitional services agreement - 5
Other income 10 6
---------------------------------------------------------- ----- -----
12 25
---------------------------------------------------------- ----- -----
9. Acquisition costs
2011 2010
GBPm GBPm
----------------------- ----- -----
Acquisition costs paid 13 12
----------------------- ----- -----
10. Administrative expenses
2011 2010
GBPm GBPm
------------------------------------------------------- ----- -----
Employee costs 128 158
Outsourcer expenses 160 183
Investment management expenses and transaction costs 99 142
Professional fees 73 61
Office costs 45 53
Impairment of property, plant and equipment 8 -
Operating expenses in respect of investment properties 6 4
Depreciation of property, plant and equipment 3 3
Other 84 72
------------------------------------------------------- ----- -----
606 676
------------------------------------------------------- ----- -----
Certain prior year disclosures in note 10 have been amended to
conform to current year presentation.
Employee costs comprise:
2011 2010
GBPm GBPm
------------------------------ ----- -----
Wages and salaries 137 134
Social security contributions 12 13
Other pension costs (21) 11
------------------------------ ----- -----
128 158
------------------------------ ----- -----
Included with other pension costs are the benefits associated
with liability management exercises undertaken on the Group's
defined benefit pension schemes as detailed in note 32.
2011 2010
Number Number
----------------------------------- ------- -------
Average number of persons employed
Phoenix Life 804 758
Ignis Asset Management 551 520
----------------------------------- ------- -------
1,355 1,278
----------------------------------- ------- -------
11. Auditors' remuneration
The remuneration of the Company's auditors, including their
associates, in respect of services supplied to members of the Group
was GBP6.7 million (2010: GBP13.6 million). No services were
provided by the Company's auditors to the Group's pension
schemes.
2011 2010
GBPm GBPm
-------------------------------------------------------------------------------- ----- -----
Audit of the consolidated financial statements 0.5 0.7
The auditing of accounts of subsidiaries of the Company pursuant to legislation 2.9 3.5
Other services supplied pursuant to such legislation:
Audit related 0.4 0.7
Services as reporting accountants 0.1 6.6
Other services:
Audit of MCEV supplementary information 0.6 0.8
Other 2.2 1.3
-------------------------------------------------------------------------------- ----- -----
6.7 13.6
-------------------------------------------------------------------------------- ----- -----
The total remuneration of the Company's auditors for services as
reporting accountants during the prior year mainly comprised
services provided in respect of the Premium Listing.
12. Finance costs
2011 2010
GBPm GBPm
-------------------------------------------------------- ----- -----
Interest expense
On borrowings at amortised cost 215 196
On borrowings at fair value through profit or loss 36 73
======================================================== ===== =====
251 269
-------------------------------------------------------- ----- -----
Attributable to:
- policyholders 122 101
- owners 129 168
-------------------------------------------------------- ----- -----
251 269
-------------------------------------------------------- ----- -----
13. Tax charge/(credit)
13.1 Current year tax charge/(credit)
2011 2010
GBPm GBPm
----------------------------------------------------------------- ----- -----
Current tax:
UK Corporation tax 68 30
Overseas tax 16 7
----------------------------------------------------------------- ----- -----
84 37
Adjustment in respect of prior years (57) 16
----------------------------------------------------------------- ----- -----
27 53
Deferred tax:
Reversal/origination of temporary differences
On non--profit surpluses (9) (32)
On amortisation of acquired in--force business (44) (50)
On amortisation of customer relationship intangible (5) (5)
Capital allowances in excess of depreciation 6 -
On accrued interest 7 (38)
Losses on group restructuring not matched in accounts - (33)
Tax losses arising in the current year carried forward - (17)
Pension scheme movements 30 19
On provisions for future expenditure 2 (6)
Other temporary differences 3 -
Utilisation of tax losses 131 57
Change in the rate of corporation tax (41) (19)
Write (up)/down of deferred tax assets (13) 2
----------------------------------------------------------------- ----- -----
67 (122)
Total tax charge/(credit) 94 (69)
----------------------------------------------------------------- ----- -----
Attributable to:
- policyholders 173 5
- owners (79) (74)
----------------------------------------------------------------- ----- -----
94 (69)
----------------------------------------------------------------- ----- -----
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 attributable to policyholder earnings was GBP173 million
(2010: GBP5 million).
13.2 Tax credited to other comprehensive income
2011 2010
GBPm GBPm
----------------------------------------------------------- ----- -----
Deferred tax on actuarial gains of defined benefit schemes (1) (4)
----------------------------------------------------------- ----- -----
13.3 Reconciliation of tax charge/(credit)
2011 2010
GBPm GBPm
--------------------------------------------------------------------------- ----- -----
(Loss)/profit before tax (4) 11
Policyholder tax charge (173) (5)
--------------------------------------------------------------------------- ----- -----
(Loss)/profit before the tax attributable to owners (177) 6
--------------------------------------------------------------------------- ----- -----
Tax at standard UK1 rate of 26.5% (2010: 28%) (47) 2
Net tax losses on group restructuring not matched in accounts - (110)
Untaxed income and gains (7) (61)
Disallowable expenses 3 18
Adjustment to tax charge in respect of prior years (57) 16
Movement in non--profit surplus taxed at less than 26.5% (2010: 28%) 13 20
Movement on acquired in--force amortisation at less than 26.5% (2010: 28%) 3 1
Profits taxed at rates other than 26.5% (2010: 28%) 19 (3)
Tax losses not previously valued (11) (8)
Prior year deferred tax 20 12
Deferred tax rate change (41) (19)
Current year losses not valued 3 41
Temporary differences not valued 27 11
Other (4) 6
--------------------------------------------------------------------------- ----- -----
Owners' tax credit (79) (74)
Policyholder tax charge 173 5
--------------------------------------------------------------------------- ----- -----
Total tax charge/(credit) for the year 94 (69)
--------------------------------------------------------------------------- ----- -----
1 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.
14. Dividends on ordinary shares
2011 2010
GBPm GBPm
------------------------------------ ----- -----
Dividends declared and paid in 2011 72 54
------------------------------------ ----- -----
On 30 March 2011, the Board recommended a final dividend of
GBP0.21 per share in respect of the year ended 31 December 2010. A
scrip dividend option was available to shareholders and the total
dividend that was settled on 17 May 2011, following shareholders'
approval at the AGM, amounted to GBP36 million of which GBP7
million was settled via the scrip dividend option.
On 24 August 2011, the Board declared an interim dividend of
GBP0.21 per share for the half year ended 30 June 2011. A scrip
dividend option was available to shareholders and the total
dividend that was settled on 7 October 2011 amounted to GBP36
million of which GBP10 million was settled via the scrip dividend
option.
15. Earnings per share
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.
2011 2010
GBPm GBPm
----------------------------------------------------------- ----- -----
(Loss)/profit for the year (98) 80
Share of result attributable to non--controlling interests (33) (50)
----------------------------------------------------------- ----- -----
(Loss)/profit attributable to owners (131) 30
----------------------------------------------------------- ----- -----
The basic earnings per share of (76.2p) (2010: 20.1p) has been
based on the loss of GBP131million (2010: profit GBP30 million) and
a weighted average number of ordinary shares outstanding during the
year of 172 million (2010: 149 million), calculated as follows:
2011 2010
Number Number
million million
------------------------------------------------ -------- --------
Issued ordinary shares at beginning of the year 171 130
Effect of ordinary shares issued/redeemed 1 19
------------------------------------------------ -------- --------
Weighted average number of ordinary shares 172 149
------------------------------------------------ -------- --------
The diluted earnings per share of (76.2p) (2010: 20.1p) has been
based on the loss of GBP131 million (2010: profit GBP30 million)
and a diluted weighted average number of ordinary shares
outstanding during the year of 172 million (2010: 149 million)
calculated as follows:
2011 2010
Number Number
million million
----------------------------------------------------- -------- --------
Weighted average number of ordinary shares 172 149
Effect of warrants in issue - -
----------------------------------------------------- -------- --------
Weighted average number of ordinary shares (diluted) 172 149
----------------------------------------------------- -------- --------
The IPO warrants were not dilutive in either 2011 or 2010 due to
the exercise price of the warrants being significantly higher than
the share price of the Company. The Founders' and Sponsors'
warrants were converted into ordinary shares during 2010.
The following instruments could potentially dilute basic
earnings per share in the future but have not been included in the
diluted earnings per share figure because, due to their exercise
price, they did not have a dilutive effect for the periods
presented:
-- 5 million warrants issued to the Lenders on 2 September
2009;
-- 12.36 million warrants issued to Royal London on 2 September
2009; and
-- the Founders', Sponsors' and IPO warrants from 2 September
2009 on which date the exercise price of the outstanding warrants
was increased from EUR7 to EUR11.
Details of the warrants are given in note 24.
There are 3,600,000 remaining contingent rights over ordinary
shares which will result in the issue of ordinary shares on a
one--for--one basis 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 for this
conversion were not met in the reporting period, these additional
shares have not been included in the diluted earnings per share
figures.
16. Share capital
2011 2010
GBP GBP
--------------------------------------------------------------------- ------ ------
Authorised:
410 million (2010: 410 million) ordinary shares of EUR0.0001 each 31,750 31,750
--------------------------------------------------------------------- ------ ------
Issued and fully paid:
174.5 million (2010: 171.5 million) ordinary shares of EUR0.001 each 14,165 13,904
--------------------------------------------------------------------- ------ ------
The holders of 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. Movements in
issued share capital during the year:
2011
Number GBP
---------------------------------------------------- ----------- ------
Shares in issue at 1 January 171,455,610 13,904
Ordinary shares issued for scrip dividend (note 14) 3,005,093 260
Other ordinary shares issued in the year 12,112 1
---------------------------------------------------- ----------- ------
Shares in issue at 31 December 174,472,815 14,165
---------------------------------------------------- ----------- ------
During the year, the Company issued 12,112 shares at a premium
of GBP68,190 in order to satisfy its obligation to employees under
the Group's share schemes.
2010
Number GBP
------------------------------------------------------------------------------------ ----------- ------
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 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
------------------------------------------------------------------------------------ ----------- ------
17. Shares held by the employee trust and group entities
2011 2010
GBPm GBPm
-------------------------------------------------------------------------------------- ----- -----
At 1 January 13 4
Purchased in year - 10
Vested to employees in year (2) (4)
Shares issued to group entity on conversion of contingent rights over ordinary shares - 3
-------------------------------------------------------------------------------------- ----- -----
At 31 December 2011 11 13
-------------------------------------------------------------------------------------- ----- -----
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 issued to Pearl Assurance Limited
following the restructuring of the contingent rights over ordinary
shares of the Company which occurred during 2010. During the year
nil (2010: 1,580,671) further shares were purchased on market and
306,250 (2010: 595,740) shares were awarded to employees (see note
18). The number of shares held by the PGH EBT at 31 December 2011
was 1,245,509 (2010: 1,484,931).
18. Share--based payment
18.1 Share--based payment expense
The expense recognised for employee services receivable during
the year is as follows:
2011 2010
GBPm GBPm
----------------------------------------------------------------------- ----- -----
Expense arising from equity--settled share--based payment transactions 6 8
Expense arising from cash--settled share--based payment transactions 1 1
----------------------------------------------------------------------- ----- -----
Total expense arising from share--based payment transactions 7 9
----------------------------------------------------------------------- ----- -----
The carrying amount of the liability relating to the
cash--settled options at 31 December 2011 is GBP2 million (2010:
GBP1 million) and is included within other payables.
18.2 Share--based payment schemes in issue
Long--term incentive plan ('LTIP')
In 2009, the Group implemented a long--term incentive plan to
retain and motivate its senior management group. The awards under
this plan are in the form of nil--cost options to acquire an
allocated number of ordinary shares. Assuming no good leavers or
other events which would trigger early vesting rights, these awards
will be subject to performance conditions tied to the Company's
financial performance in respect of growth in embedded value and
cumulative cash generation over a three year period. There are no
cash settlement alternatives. The 2009 LTIP awards vested in 2010.
Further awards were made in 2010 which will vest on 28 May 2013 and
in 2011 which will vest on 12 April 2014.
The 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.
Save As You Earn ('SAYE')
The SAYE scheme allows participating employees to save up to
GBP250 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 at a discount to the share price on the date of grant.
Employees leaving the Group for certain reasons are able to use
their savings to purchase shares if they leave less than six months
before the end of their 3 or 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 2010 SAYE and 2011 SAYE awards in the
year:
2011 SAYE 2010 SAYE
------------------------ --------------------------------------------- ---------------------------------------------
Share price (p) 669.5 650.0
Exercise price (GBP) 5.72 5.63
Expected life (years) 3.25 and 5.25 3.25 and 5.25
Risk--free rate (%) 1.8 (for 3.25 year scheme) and 2.6 (for 5.25 2.0 (for 3.25 year scheme) and 2.8 (for 5.25
year scheme) based on UK Government Gilts year scheme) based on UK Government Gilts
with with
a term commensurate with the expected term a term commensurate with the expected term
for each award for each award.
Expected volatility (%) 30.0 which is based on the Company's share 30.0 which is based on the Company's share
price volatility to date price volatility to date.
Dividend yield (%) 6.3 0
------------------------ --------------------------------------------- ---------------------------------------------
Bonus share plan ('BSP')
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 two
years. 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 options were granted. The majority of
awards vested in 2011.
Deferred cash plan
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 by the Group.
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 end to reflect
movements in Phoenix Group Holdings' share price.
Deferred bonus share plan ('Deferred BSP')
With effect from 31 December 2010, part of the annual incentive
for certain executives, for any year, is deferred into Phoenix
Group Holdings' shares. This grant of shares is conditional on the
employee remaining in employment with the Group for a period of
three years. The 2010 Deferred BSP shares are expected to vest on 6
April 2014.
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 options were granted.
18.3 Movements in the year
The following tables illustrate the number of, and movements in,
share options during the year:
No of share options 2011
-------------------------------------------------------
Deferred 2010
LTIP 2009 cash Deferred
Schemes SAYE Schemes BSP plan BSP
----------------------------------------- --------- ------------ --------- -------- ---------
Outstanding at the beginning of the year 1,424,549 1,037,214 326,250 229,370 -
Granted during the year 1,405,116 310,366 - - 88,729
Forfeited during the year (271,185) (206,851) - - -
Exercised during the year - (12,112) (306,250) - -
----------------------------------------- --------- ------------ --------- -------- ---------
Outstanding at the end of the year 2,558,480 1,128,617 20,000 229,370 88,729
----------------------------------------- --------- ------------ --------- -------- ---------
No of share options 2010
-------------------------------------------------------
Deferred 2010
LTIP 2009 cash Deferred
Schemes SAYE Schemes BSP plan BSP
========================================= ========= ============ ========= ======== =========
Outstanding at the beginning of the year 403,750 - 403,750 - -
Granted during the year 1,601,087 1,163,948 40,000 229,370 -
Forfeited during the year (106,241) (121,395) - - -
Exercised during the year (474,047) (5,339) (117,500) - -
----------------------------------------- --------- ------------ --------- -------- ---------
Outstanding at the end of the year 1,424,549 1,037,214 326,250 229,370 -
----------------------------------------- --------- ------------ --------- -------- ---------
The weighted average fair value of options granted during the
year was GBP5.65 (2010: GBP4.95).
The weighted average share price at the date of exercise for the
rewards exercised is GBP5.84 (2010: GBP6.77).
The weighted average remaining contractual life for the rewards
outstanding as at 31 December 2011 is 2.0 years (2010: 2.5
years).
19. Non--controlling interests
2011
Perpetual Reset Capital Securities UK Commercial Property Trust Limited Total
GBPm GBPm GBPm
------------------------------------- ---------------------------------- ------------------------------------ -----
At 1 January 411 309 720
Profit for the year 15 18 33
Dividends paid - (21) (21)
Coupon paid, net of tax relief (19) - (19)
Shares in subsidiaries subscribed for
by non--controlling interests - 1 1
------------------------------------- ---------------------------------- ------------------------------------ -----
At 31 December 407 307 714
------------------------------------- ---------------------------------- ------------------------------------ -----
2010
Perpetual UK
Reset Capital Securities Commercial Property Trust Limited Total
GBPm GBPm GBPm
------------------------------------------------ ------------------------- ---------------------------------- -----
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
------------------------------------------------ ------------------------- ---------------------------------- -----
19.1 Perpetual Reset Capital Securities
On 1 January 2010, Pearl Group Holdings (No. 1) Limited ('PGH1')
had in issue GBP500 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. Following amendments
made to the Notes in 2010, the principal amount outstanding is now
GBP425 million.
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 coupon payments may be
deferred at the option of PGH1; accordingly the Notes meet the
definition of equity for financial reporting purposes. Under the
rules of the FSA, the Notes also meet the conditions to be included
in Tier 1 capital in the calculation of the Group's Capital
Resources. 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.
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. These restrictions
would also apply to the Company until the deferred coupon payment
is satisfied.
On 25 April 2011, the 2011 coupon was settled in full.
19.2 UK Commercial Property Trust Limited
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.
20. Liabilities under insurance contracts
Gross
Gross liabilities Reinsurers' share liabilities Reinsurers' share
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
------------------------------------------- ----------------- ----------------- ------------ -----------------
Life assurance business:
Insurance contracts 40,517 3,153 38,770 2,939
Investment contracts with DPF 11,283 - 11,709 -
------------------------------------------- ----------------- ----------------- ------------ -----------------
51,800 3,153 50,479 2,939
------------------------------------------- ----------------- ----------------- ------------ -----------------
Amounts due for settlement after 12 months 46,759 2,792 42,376 2,719
------------------------------------------- ----------------- ----------------- ------------ -----------------
Gross
Gross liabilities Reinsurers' share liabilities Reinsurers' share
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------------------------------- ----------------- ----------------- ------------ -----------------
At 1 January 50,479 2,939 50,291 2,860
Premiums 1,473 85 1,534 85
Claims (4,968) (224) (5,260) (210)
Other changes in liabilities 4,833 361 3,978 214
Foreign exchange adjustments (17) (8) (37) (10)
Transfer to statement of consolidated
comprehensive income in respect of actuarial
losses
of defined benefit pension scheme - - (27) -
----------------------------------------------- ----------------- ----------------- ------------ -----------------
At 31 December 51,800 3,153 50,479 2,939
----------------------------------------------- ----------------- ----------------- ------------ -----------------
21. Unallocated surplus
2011 2010
GBPm GBPm
------------------------------------ ----- -----
At 1 January 864 721
Transfer (to)/from income statement (16) 143
------------------------------------ ----- -----
At 31 December 848 864
------------------------------------ ----- -----
22. Borrowings
Carrying value Fair value
---------------- ------------
2011 2010 2011 2010
GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------- ------- ----- -----
Limited recourse bonds 2012 7.39% (note a) 11 29 11 29
Limited recourse bonds 2022 7.59% (note a) 90 94 102 97
GBP779 million loan (note b) - 757 - 766
GBP15 million loan (note b) - 14 - 15
GBP4 million loan (note b) - 4 - 4
Property Reversions loan (note c) 217 234 217 234
GBP80 million facility agreement (note d) 80 42 80 42
GBP150 million term facility (note e) 60 - 60 -
---------------------------------------------------------- ------- ------- ----- -----
Total policyholder borrowings 458 1,174 470 1,187
GBP200 million 7.25% unsecured subordinated loan (note f) 135 127 154 170
Unsecured loan notes (note g) 7 12 7 12
GBP2,260 million syndicated loan (note h) 1,993 2,138 1,993 2,138
GBP100 million PIK notes and facility (note i) 111 106 111 106
GBP75 million secured loan note (note j) 73 72 73 72
GBP425 million loan facility (note j) 375 399 375 399
---------------------------------------------------------- ------- ------- ----- -----
Total shareholder borrowings 2,694 2,854 2,713 2,897
Total borrowings 3,152 4,028 3,183 4,084
---------------------------------------------------------- ------- ------- ----- -----
Amount due for settlement after 12 months 2,983 3,838
---------------------------------------------------------- ------- -------
Debenture loans
a. In 1998, National Provident Institution raised GBP260 million
of capital through the securitisation of embedded value on a block
of existing unit--linked and unitised with--profit life and pension
policies. Following the demutualisation of National Provident
Institution, these were transferred to National Provident Life
Limited ('NPLL'). The bonds are split between two classes, which
rank pari passu. The GBP140 million 7.39% class A1 limited recourse
bonds with an outstanding principal of GBP11 million (2010: GBP27
million) mature in 2012. A principal repayment of GBP16 million was
made in September2011 as per the terms of the agreement. The GBP120
million 7.59% limited recourse bonds with an outstanding principal
of GBP120 million (2010: GBP120 million) have an average remaining
life of 7 years maturing in 2022. NPLL has provided collateral of
GBP65 million (2010: GBP77 million) to provide security to the
holders of the NPLL recourse bonds in issue.
b. On 21 March 2011, the GBP779 million loan, GBP15 million loan
and GBP4 million loan were all settled for consideration of GBP782
million as part of the restructure of a GBP1.2 billion portfolio of
corporate loans.
c. The Property Reversions loan from Abbey National Property
Investments was brought into the consolidated financial statements
at fair value. It relates to the sale of Extra--Income Plan
policies that Abbey National Property Investments finances to the
value of the associated property reversions. As part of the
arrangement Abbey National Property Investments receive an amount
calculated by reference to the movement in the Halifax House Price
Index and NPLL and NPI Limited have undertaken to indemnify Abbey
National Property Investments against profits or losses arising
from mortality or surrender experience which differs from the basis
used to calculate the reversion amount. Repayment will be on a
policy--by--policy basis and is expected to occur over the next 10
to 20 years. During the year, a repayment of GBP27 million was
made. Note 35 contains details of the assets that support this
loan.
d. In 2008, UKCPT entered into an GBP80 million revolving loan
facility agreement. This loan accrues interest at LIBOR plus a
variable margin of 0.50% to 0.60% per annum. The lender holds a
floating charge over certain assets of UKCPT and its subsidiaries.
The repayment date for this facility is 19 June 2015. This facility
was fully utilised during 2011 in order to increase UKCPT's
property portfolio.
e. On 19 May 2011, UKCPT entered into a GBP150 million
investment term loan facility agreement. The GBP150 million
investment term loan facility agreement accrues interest at LIBOR
plus a variable margin of 1.60% to 2.00% per annum. The lender
holds security over the assets of UK Commercial Property Estates
Holdings Limited and UK Commercial Property Estates Limited, both
of which are subsidiaries of UKCPT. The repayment date for this
facility is 19 May 2018. As at 31 December 2011 the amount drawn
down was GBP60 million.
f. Scottish Mutual Assurance Limited issued GBP200 million 7.25%
undated, unsecured subordinated loan notes on 23 July 2001. The
earliest repayment date of the notes is 25 March 2021 and
thereafter on each fifth anniversary so long as the notes are
outstanding. With effect from 1 January 2009, as a part of a Part
VII transfer, these loan notes were transferred into the
shareholder fund of Phoenix Life Limited ('PLL'). In the event of
the winding--up of PLL, the right of payment under the notes is
subordinated to the rights of the higher--ranking creditors
(principally policyholders). Phoenix Group Holdings assumed these
subordinated loan notes as a result of the acquisition of the Pearl
businesses at their fair value and as such, the outstanding
principal of these subordinated loan notes differs from the
carrying value in the statement of financial position. The fair
value adjustments which were recognised on acquisition will unwind
over the remaining life of these subordinated loan notes.
g. Unsecured loan notes of GBP72 million were issued by Impala
Holdings Limited ('Impala') at par on 14 May 2008 at an interest
rate of LIBOR minus 1% per annum which are due to mature at the end
of 2012. During the year GBP5 million (2010: GBP6 million) of these
loan notes have been repaid and GBP7 million (2010: GBP12 million)
were outstanding.
h. On 14 May 2008, PGH (LC1) Limited and PGH (LC2) Limited
jointly obtained a GBP2,260 million loan facility from a syndicate
of external banks (the 'Impala Facility'). This facility was split
into Tranche loans A, B and C of GBP1,275 million, GBP492.5 million
and GBP492.5 million respectively. The terms of this facility
are:
-- Tranche A loan of GBP1,275 million is repayable over the
period from 30 April 2011 to 30 November 2014 and attracts interest
at LIBOR plus a cash margin of 1.00% and a PIK margin of 1.00% for
the first four years and LIBOR plus a cash margin of 2.50% for the
subsequent years;
-- Tranche B loan of GBP492.5 million is repayable on 30
November 2015 and attracts interest at LIBOR plus a cash margin of
1.25% and a PIK margin of 0.75% for the first four years and LIBOR
plus a cash margin of 3.25% for the subsequent years; and
-- Tranche C loan of GBP492.5 million is repayable on 30
November 2016 and attracts interest at LIBOR plus a cash margin of
1.75% and a PIK margin of 0.25% for the first four years and LIBOR
plus a cash margin of 3.75% for the subsequent years.
The borrowings under the GBP2,260 million facility are secured
by:
-- first fixed and floating charges over all the assets and
undertaking of PGH (LC1) Limited and PGH (LC2) Limited (including
their respective 12.5% shareholding in Impala, all real estate,
book debts, bank accounts, investments and other assets); and
-- a limited recourse share charge granted by PGH2 over its 75%
shareholding in Impala.
During 2011, a repayment of GBP145 million (2010: GBP122
million) was made.
i. On 14 May 2008, PGH (MC1) Limited issued PIK notes to the
value of GBP154.5 million to Royal London and PGH (MC2) Limited
obtained a GBP154.5 million PIK facility from Royal London. The PIK
notes and facility were subsequently amended on 2 September 2009,
leaving a total of GBP100 million outstanding. At 31 December 2009,
interest of GBP2 million had been capitalised, leaving an
outstanding balance of GBP102 million. 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 2011,
interest of GBP5 million (2010: GBP4 million) was capitalised on
the PIK notes and facility. The final maturity date on the PIK
notes and facility is 30 June 2019.
j. On 15 November 2006, PGH (LCA) Limited and PGH (LCB) Limited
jointly became a party to a GBP905 million loan facility from a
syndicate of external banks (the 'Pearl Facility'). This loan was
subsequently amended on 2 September 2009, leaving GBP425 million
outstanding on this facility and GBP75 million of secured C loan
notes.
The GBP425 million facility is repayable over the period from 30
June 2011 to 30 June 2016, attracting interest at LIBOR plus a
margin of 1.25%. The GBP75 million secured C loan notes are
repayable 15 years after amendment and attract interest at LIBOR
plus a margin of 1.00%.
The borrowings under the GBP425 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 a scheduled repayment of GBP24 million was made
on the GBP425 million loan facility and interest of GBP1 million
(GBP2010: GBP2 million) was capitalised on the GBP75 million
secured C loan notes.
23. Deposits received from reinsurers
2011 2010
GBPm GBPm
------------------------------------------ ----- -----
Carrying value and fair value:
At 31 December 472 419
------------------------------------------ ----- -----
Amount due for settlement after 12 months 439 384
------------------------------------------ ----- -----
24. Derivatives
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 Liabilities Assets Liabilities
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------------------------------- ------ ----------- ------ -----------
Warrants over shares in Phoenix Group Holdings - 3 - 5
Forward currency 771 794 641 692
Credit default options 33 - 3 11
Interest rate swaps 4,600 3,473 2,064 1,709
Swaptions 396 - 241 -
Inflation swaps 33 2 26 2
Equity options 216 - 186 -
Stock index futures 46 16 36 12
Fixed income futures 4 4 - -
----------------------------------------------- ------ ----------- ------ -----------
6,099 4,292 3,197 2,431
----------------------------------------------- ------ ----------- ------ -----------
The amount recoverable after one year is GBP4,320 million (2010:
GBP2,247 million). The amount payable after one year is GBP3,368
million (2010: GBP1,517 million).
Warrants over shares
On 1 January 2010, the Company had in issue 7.5 million
Founders' warrants, 8.2 million IPO warrants, 12.4 million warrants
held by Royal London and 5 million held by the Lenders. The table
below shows a reconciliation of the outstanding number of these
warrants:
2011
Founders' warrants Lenders' warrants Royal London warrants
IPO warrants Number Number Number Number
----------------------- ------------------- ----------------------- ----------------------- ----------------------
At 1 January and 31
December 8,169,868 - 5,000,000 12,360,000
----------------------- ------------------- ----------------------- ----------------------- ----------------------
2010
Founders' warrants Lenders' warrants Royal London warrants
IPO warrants Number Number Number 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 and Founders' warrants
The IPO and Founders' warrants originally entitled the holder to
purchase one ordinary share at a price of EUR7.00 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 EUR11. At 31 December 2011, the terms of the IPO
warrants entitle the holder to purchase 1.0272 (2010: 1.009507)
ordinary shares per IPO warrant, for an exercise price of EUR10.71
(2010: EUR10.90).
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 LSE. The IPO warrants were
subsequently delisted from Euronext on 17 November 2010.
The exercise period for the IPO warrants commenced on the later
of:
-- consummation by the Company of a business combination;
and
-- first anniversary of the date the units were admitted to
trading on Euronext.
The IPO warrants will expire at the close of trading on the LSE
on 3 September 2014 or earlier upon redemption or liquidation. Once
the warrants become exercisable, the Company may call the warrants
for redemption:
-- in whole but not in part;
-- at a price of EUR0.01 per warrant;
-- upon not less than 30 days' prior written notice of
redemption to each warrant holder; and
-- if, and only if, the reported last sale price of the share
equals or exceeds EUR13.75 per share for any 20 trading days within
a period of 30 consecutive trading days ending on the third
business day prior to the notice of redemption to warrant holders.
On 2 September 2009 the threshold of EUR13.75 was increased to
EUR16.50 and was subsequently amended to EUR16.34 on 15 October
2010.
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 LSE for the Company. Due to the
relatively low number of IPO warrants in issue, they are thinly
traded and the quoted price is not considered to be the best
indicator of their fair value. As a result the IPO warrants have
been valued using an extended Black--Scholes valuation model. The
key assumptions used to ascertain a value as at 31 December 2011
are as follows:
-- share price as at 31 December 2011 of GBP5.25;
-- volatility of 30%;
-- the warrants are not adjusted for dividends; and
-- the valuation incorporates the impact of amending some of the
terms of the warrants on 15 October 2010.
At 31 December 2011 the IPO warrants were valued at GBP1 million
(2010: GBP2 million).
Lenders' warrants
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 GBP15 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:
-- 15th anniversary of the date issued;
-- date fixed for the redemption of the warrants; and
-- liquidation of the Company.
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 EUR0.01 per warrant provided that
the last closing bid price of the ordinary shares is equal to or
exceeds GBP19.50 on each of 20 consecutive trading days. On 15
October 2010, this threshold of GBP19.50 was amended to GBP19.32.
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 EUR0.01
redemption price.
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
GBP250,000 (2010: GBP280,000).
Royal London warrants
On 2 September 2009, the Company issued 12.36 million warrants
(2 million transferable and 10.36 million non--transferable) over
its shares to Royal London as part consideration for acquiring the
benefit of GBP250 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 EUR11 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:
-- 5th anniversary of the date issued;
-- date fixed for the redemption of the warrants; and
-- liquidation of the Company.
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 EUR0.01 per warrant, provided that
the last closing bid price of the ordinary shares is equal to or
exceeds EUR16.50 on each of 20 consecutive trading days. On 15
October 2010, this threshold of EUR16.50 was amended to EUR16.34.
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 EUR0.01 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
2011 are as for the IPO warrants (see above). The value of the
warrants at the year end was GBP2 million (2010: GBP3 million).
25. Obligations for repayment of collateral received
2011 2010
GBPm GBPm
------------------------------------------ ------ ------
Carrying value and fair value:
At 31 December 13,005 10,160
------------------------------------------ ------ ------
Amount due for settlement after 12 months 1,552 628
------------------------------------------ ------ ------
26. Financial liabilities
Carrying value Fair value
---------------- --------------
2011 2010 2011 2010
GBPm GBPm GBPm GBPm
------------------------------------------------------------ ------- ------- ------ ------
Financial liabilities at fair value through profit or loss:
Designated upon initial recognition 11,404 11,020 11,404 11,020
Held for trading - derivatives 4,292 2,431 4,292 2,431
Financial liabilities measured at amortised cost 16,412 14,373 16,442 14,376
------------------------------------------------------------ ------- ------- ------ ------
32,108 27,824 32,138 27,827
------------------------------------------------------------ ------- ------- ------ ------
Amount due for settlement after 12 months 8,343 6,366
------------------------------------------------------------ ------- -------
27. Provisions
2011
Leasehold Staff Known
properties related incidents Other Total
GBPm GBPm GBPm GBPm GBPm
------------------------- ----------- -------- ---------- ----- -----
At 1 January 37 21 1 14 73
Additions in the year 11 7 4 2 24
Utilised during the year (4) (4) - (4) (12)
Released during the year (16) (3) - (7) (26)
------------------------- ----------- -------- ---------- ----- -----
At 31 December 28 21 5 5 59
------------------------- ----------- -------- ---------- ----- -----
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 costs associated
with restructuring across the Group. These include provisions for
unfunded pensions of GBP5 million (2010: GBP5 million) and private
medical insurance costs for former employees of GBP3 million (2010:
GBP4 million). These provisions have been calculated on a realistic
basis.
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.
28. Tax assets and liabilities
2010
2011 Restated
GBPm GBPm
----------------------------- ----- ---------
Current tax receivables 8 5
Net deferred tax assets - -
----------------------------- ----- ---------
Total tax assets 8 5
----------------------------- ----- ---------
Current tax payables 105 99
Net deferred tax liabilities 673 607
----------------------------- ----- ---------
Total tax liabilities 778 706
----------------------------- ----- ---------
Deferred tax assets comprise
2010
2011 Restated
GBPm GBPm
-------------------------------------------------------- ----- ---------
Trading losses 37 82
Expenses and deferred acquisition costs carried forward 14 86
Provisions and other temporary differences 11 20
Pension scheme deficit - 21
Accelerated capital allowances 18 25
Unpaid interest 34 44
-------------------------------------------------------- ----- ---------
Gross deferred tax assets 114 278
Less: offset against deferred tax liabilities (114) (278)
-------------------------------------------------------- ----- ---------
Net deferred tax assets - -
-------------------------------------------------------- ----- ---------
Deferred tax liabilities comprise
2010
2011 Restated
GBPm GBPm
------------------------------------------------------------------------------------------ ----- ---------
Acquired in--force business 593 670
Customer relationships 100 114
Surplus within the non--profit funds 62 64
Provisions and other temporary differences 8 17
Adjustment for insurance policies held with related parties in respect of the PGL Pension
Scheme 24 20
------------------------------------------------------------------------------------------ ----- ---------
Gross deferred tax liabilities 787 885
------------------------------------------------------------------------------------------ ----- ---------
Less: offset against deferred tax assets (114) (278)
------------------------------------------------------------------------------------------ ----- ---------
Net deferred tax liabilities 673 607
------------------------------------------------------------------------------------------ ----- ---------
Movements in net deferred tax liabilities comprise
2010
2011 Restated
GBPm GBPm
---------------------------------------------------------------- ----- ---------
At 1 January (607) (695)
Write off to goodwill - (38)
Amounts (charged)/credited to the income statement (67) 122
Amounts credited to the statement of other comprehensive income 1 4
---------------------------------------------------------------- ----- ---------
At 31 December (673) (607)
---------------------------------------------------------------- ----- ---------
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.
A gradual reduction in the UK corporation tax rate from 28% to
24% over four years was announced in the Emergency Budget of 22
June 2010 with further 1% reductions being announced in each of the
Budgets of 23 March 2011 and 21 March 2012. The Finance (No. 2) Act
2010 included the first of the 1% rate reductions with effect from
April 2011, a further 1% reduction was substantively enacted on 29
March 2011 under the Provisional Collection of Taxes Act 1968 and a
further 1% reduction (effective from April 2012) was included in
Finance Act 2011. Consequently a rate of 25% has been used for the
purposes of providing deferred tax in these financial statements.
Further reductions are to be introduced by future legislation. The
benefit to the Group's net assets arising from the further 3%
reduction of rate is estimated as GBP64 million in total and will
be recognised as the legislation is substantively enacted.
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 Group
has been actively involved in consulting with HMRC and HM Treasury
on the detail of the new rules, including providing comments on
proposed draft legislation, with the aim of ensuring that the
Group's policyholders and shareholders are, as far as possible, not
adversely affected by the changes.
The Group is still assessing the likely impact of the new rules
(subject to the final legislation which will be introduced
following the March 2012 Budget). The Group's view, at this stage,
is that transition to the new rules is likely to result in the
acceleration of some taxable profits (which will be recognised over
a 10--year period under transitional provisions in the new rules),
but this is not expected to have a material impact on its overall
tax position.
Deferred income tax assets are recognised for tax losses carried
forward only to the extent that realisation of the related tax
benefit is probable.
2011 2010
GBPm GBPm
-------------------------------------------------------------------- ----- -----
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 102 103
Excess expenses and deferred acquisition costs carried forward 22 22
Provisions and other temporary differences 14 7
Deferred tax assets not recognised on capital losses(1) 262 165
-------------------------------------------------------------------- ----- -----
1 These can only be recognised against future capital gains and have no expiry date.
29. Payables related to direct insurance contracts
2011 2010
GBPm GBPm
----------------------------------------------- ----- -----
Payables related to direct insurance contracts 707 713
----------------------------------------------- ----- -----
Amount due for settlement after 12 months 39 40
----------------------------------------------- ----- -----
Payables relating to direct insurance contracts include claims
outstanding on general insurance and life assurance. The general
insurance element amounts to GBP240 million (2010: GBP263
million).
General insurance
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.
Pearl Assurance Limited
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.
PA (GI) Limited
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.
30. Accruals and deferred income
2011 2010
GBPm GBPm
------------------------------------------ ----- -----
Accruals 175 214
------------------------------------------ ----- -----
Amount due for settlement after 12 months 6 9
========================================== ===== =====
31. Other payables
2011 2010
GBPm GBPm
------------------------------------------ ----- -----
Investment broker balances 487 187
Other payables 140 140
------------------------------------------ ----- -----
627 327
------------------------------------------ ----- -----
Amount due for settlement after 12 months - -
------------------------------------------ ----- -----
32. Pension schemes
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.
2011 2010
GBPm GBPm
--------------------------------------------------------------------------------------------- ----- -----
Pearl Group Staff Pension Scheme
--------------------------------------------------------------------------------------------- ----- -----
Economic surplus/(deficit) (including GBP56 million (2010: nil) available as a refund on a
winding-up of the scheme 56 (77)
Provision for tax on that part of the economic surplus available as a refund on a winding-up
of the scheme (19) -
--------------------------------------------------------------------------------------------- ----- -----
Reported surplus/(deficit) 37 (77)
--------------------------------------------------------------------------------------------- ----- -----
PGL Pension Scheme
============================================================================================= ===== =====
Economic surplus (including GBP471 million (2010: GBP92 million) available as a refund on
a winding-up of the scheme) 520 165
Adjustment for insurance policies held with related parties and eliminated on consolidation (94) (74)
--------------------------------------------------------------------------------------------- ----- -----
Net economic surplus 426 91
Provision for tax on that part of the economic surplus available as a refund on a winding-up
of the scheme (149) (32)
--------------------------------------------------------------------------------------------- ----- -----
Reported surplus 277 59
--------------------------------------------------------------------------------------------- ----- -----
Total reported pension scheme surplus/(deficit) 314 (18)
--------------------------------------------------------------------------------------------- ----- -----
The total net actuarial gains recognised in the statement of
consolidated comprehensive income is set out below.
2011 2010
GBPm GBPm
--------------------------------- ----- -----
Pearl Group Staff Pension Scheme 81 38
PGL Pension Scheme 170 7
--------------------------------- ----- -----
Total actuarial gains 251 45
--------------------------------- ----- -----
Information on each of these schemes is set out below.
32.1 Pearl Group Staff Pension Scheme
The Pearl Group Staff Pension Scheme ('the Pearl Scheme')
comprises a final salary section, a money purchase section and a
hybrid section (a mix of final salary and money purchase). The
final salary and hybrid sections of the Pearl Scheme are closed to
new members.
Defined contribution scheme
Contributions in the year amounted to GBP1 million (2010: GBP2
million).
Defined benefit scheme
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 ('PGH2') 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 2011, undertaken by
independent qualified actuaries. The present values of the defined
benefit obligation and the related current service costs have been
measured using the projected unit credit method.
In June 2011, following formal consultation, the trustees of the
Pearl Scheme signed a deed of amendment to the defined benefit
scheme, which closed the scheme to future accrual by active members
with effect from 1 July 2011. Thus, the active members become
deferred members of the scheme and their future service will not
qualify for benefits under the scheme. As a result of this, the
Group has recognised a curtailment gain, relating to a release from
future liabilities, of GBP3 million, which has been recognised in
the consolidated income statement during the year.
In November 2011, following formal consultation, the Group
carried out a pension increase exchange ('PIE') exercise where
existing in--scope pensioners were offered the option to exchange
future non--statutory pension increases for benefits accrued before
6 April 1997 for a higher, non increasing pension, thereby reducing
longevity and inflation risk for the Group. The offer period for
this exercise ended on 3 January 2012. The financial effect of all
acceptances received up to 31 December 2011 has been recognised in
the consolidated financial statements and the reduction in scheme
liabilities of GBP16 million is shown as a negative past service
cost.
The principal financial assumptions of the Pearl Scheme are set
out below.
2011 2010
% %
------------------------------------------------------------------------ ---- ----
Rate of general long--term increase in salaries n/a 4.45
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.10 3.45
Rate of increase for deferred pensions (CPI) 2.10 2.95
Discount rate 4.90 5.40
Inflation - RPI 3.10 3.45
Inflation - CPI 2.10 2.95
Expected rate of return on scheme assets 3.70 4.80
---------------------------------------------------------------------------- ---- ----
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 each of 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 GBP755 million.
The principal employer and the Trustees of the Pearl Scheme have
entered into an agreement, the principal terms of which provide for
the following:
-- Cash payments into the scheme of GBP25 million per annum for
a period of 10 years, commencing on 30 September 2010, subject to
certain capital resource and other requirements being maintained.
The payments due between 2020 and 2027 are calculated from
projected scheme deficits, on a funding basis, as follows: GBP2
million payable on or before 30 June 2020, GBP39 million payable on
or before 30 June 2021; GBP35 million payable on or before each of
30 June 2022, 30 June 2023 and 30 June 2024, and GBP41 million
payable on each of 30 June 2025, 30 June 2026 and 30 June 2027. The
amounts payable on and from 30 June 2021 may alter in light of any
funding shortfall disclosed as at the triennial funding valuation
immediately preceding their date of payment.
-- The Trustees being granted a first charge over shares in
Pearl Assurance Limited, National Provident Life Limited, London
Life Limited, Pearl Group Services Limited and PGS 2 Limited to
secure an amount not exceeding 60% of the deficit arising on the
triennial scheme valuation (as calculated in accordance with the
terms of the agreement), subject to an initial amount and a maximum
of GBP600 million, such security ceasing on a scheme buy out, the
principal employer discharging its liabilities under the agreement
or upon a valuation of the scheme demonstrating there is no funding
deficit if earlier. Enforcement of the security may take place on
the occurrence of various events, the main ones being (i) a failure
by the principal employer to pay agreed cash contributions to the
scheme, (ii) an insolvency or other similar financial difficulties
of the principal employer, (iii) except in certain defined
circumstances, payments of interest or principal to the principal
employer's lenders or of dividends to the principal employer's
owners being made at a time when the principal employer has failed
to maintain an embedded value of at least 1.3 times the amount
secured, (iv) the principal employer failing to maintain an
embedded value of at least 1.05 times the amount secured or (v) the
principal employer granting certain types of security over its
assets. NP Life Holdings Limited has also granted a limited
recourse share charge over the shares it holds in National
Provident Life Limited in favour of the Trustee in respect of the
principal employer's obligation under this agreement. This security
is granted on substantially the same terms as the security granted
by the principal employer.
The amounts recognised in the income statement are as
follows:
2011 2010
GBPm GBPm
--------------------------------- ----- -----
Current service cost (1) (1)
Interest cost (95) (100)
Expected return on scheme assets 81 82
Past service cost 16 -
Curtailment gain 3 -
--------------------------------- ----- -----
4 (19)
--------------------------------- ----- -----
The net actuarial gains recognised in other comprehensive income
comprise the following:
2011 2010
GBPm GBPm
-------------------------------------------------------------------------- ----- -----
Actual return less expected return on scheme assets 110 19
Experience (losses)/gains arising on scheme liabilities (22) 70
Gain/(loss) due to changes in assumptions underlying scheme liabilities 12 (51)
-------------------------------------------------------------------------- ----- -----
100 38
Change in provision for tax on the economic surplus available as a refund (19) -
-------------------------------------------------------------------------- ----- -----
81 38
-------------------------------------------------------------------------- ----- -----
The cumulative net actuarial gains recognised in other
comprehensive income amount to GBP148 million (2010: GBP67
million).
The surplus/(deficit) recognised in the statement of financial
position is as follows:
2011 2010
GBPm GBPm
-------------------------------------------- ------- -------
Fair value of scheme assets 1,846 1,725
Present value of defined benefit obligation (1,809) (1,802)
-------------------------------------------- ------- -------
37 (77)
-------------------------------------------- ------- -------
The actual return on the scheme assets comprises the
following:
2011 2010
GBPm GBPm
---------------------------------------------------- ----- -----
Expected return on scheme assets 81 82
Actual return less expected return on scheme assets 110 19
---------------------------------------------------- ----- -----
191 101
---------------------------------------------------- ----- -----
The change in the present value of the defined benefit
obligation is as follows:
2011 2010
GBPm GBPm
------------------------- ----- -----
At 1 January 1,802 1,805
Current service cost 1 1
Interest cost 95 100
Past service cost (16) -
Curtailment gain (3) -
Actuarial losses/(gains) 9 (19)
Benefits paid (79) (85)
------------------------- ----- -----
At 31 December 1,809 1,802
------------------------- ----- -----
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:
2011 2010
GBPm GBPm
---------------------------------------------------------------- ----- -----
At 1 January 1,725 1,684
Expected return on scheme assets 81 82
Actual return less expected return on scheme assets 110 19
Provision for tax on the economic surplus available as a refund (19) -
Contributions by the employer 28 25
Benefits paid (79) (85)
---------------------------------------------------------------- ----- -----
At 31 December 1,846 1,725
---------------------------------------------------------------- ----- -----
The distribution of the scheme assets at the end of the year was
as follows:
2011 2010
GBPm GBPm
---------------------------------------------------------------- ----- -----
Equities 165 203
Bonds 1,385 1,228
Properties 166 119
Cash and other 149 175
Provision for tax on the economic surplus available as a refund (19) -
---------------------------------------------------------------- ----- -----
1,846 1,725
---------------------------------------------------------------- ----- -----
Contributions totalling GBP27 million are expected to be paid
into the scheme in 2012 in accordance with the agreement with the
Trustee of the Pearl Scheme.
Table of historical information:
2011 2010 2009
GBPm GBPm GBPm
------------------------------------------------ ------- ------- -------
Fair value of scheme assets 1,846 1,725 1,684
Defined benefit obligation (1,809) (1,802) (1,805)
------------------------------------------------ ------- ------- -------
Surplus/(deficit) 37 (77) (121)
------------------------------------------------ ------- ------- -------
Experience gains on scheme assets 110 19 36
------------------------------------------------ ------- ------- -------
Experience (losses)/gains on scheme liabilities (22) 70 58
------------------------------------------------ ------- ------- -------
32.2 PGL Pension Scheme
The PGL Pension Scheme comprises a final salary section and a
defined contribution section.
Defined contribution scheme
Contributions in the year amounted to GBP2 million (2010: GBP4
million).
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final
salary arrangement which is closed to new entrants.
The valuation has been based on an assessment of the liabilities
of the PGL Pension Scheme as at 31 December 2011, undertaken by
independent qualified actuaries.
In June 2011, as outlined for the Pearl Scheme, the PGL Pension
Scheme signed a deed of amendment to the defined benefit scheme,
which closed the scheme to future accrual by active members with
effect from 1 July 2011. A curtailment gain of GBP7 million, has
been recognised in the consolidated income statement during the
year.
In November 2011, following formal consultation, the Group
carried out a PIE exercise, the same as outlined for the Pearl
Scheme, although its offer period ended on 30 December 2011. The
financial effects of the exercise were treated in the same way as
for the Pearl Scheme. The financial effects of all acceptances
received up to 31 December 2011 have been reflected as a negative
past service cost of GBP11 million in the current year. The effect
has been to reduce the Scheme liabilities by GBP11 million.
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 Pension 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 GBP255 million. Following
discussions with the Trustee of the PGL Pension Scheme it was
agreed that new cash contributions to the scheme amounting to
GBP160 million would be paid over the period from September 2010 to
August 2017. Together with the outstanding contributions of GBP28
million, due to the scheme as at the end of August 2010 following
the previous triennial valuation, the total future contributions
amount to GBP188 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 in 2010 resulted in a recovery from the with--profit
funds of GBP37 million, together with interest, in respect of the
balance due in relation to the cost of changes in longevity
assumptions determined by the previous triennial valuation.
Accordingly a contribution in respect of actuarial losses was made
by the with--profit funds of this amount, less tax, resulting in
GBP27 million being recognised in the consolidated statement of
comprehensive income in 2010.
The principal financial assumptions of the PGL Pension Scheme
are set out below.
2011 2010
% %
------------------------------------------------ ---- ----
Rate of general long--term increase in salaries n/a 4.45
Rate of increase for pensions in payment 3.00 3.30
Rate of increase for deferred pensions ('CPI') 2.10 2.95
Discount rate 4.90 5.40
Inflation - RPI 3.10 3.45
Inflation - CPI 2.10 2.95
Expected rate of return on scheme assets 3.90 5.10
---------------------------------------------------- ---- ----
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 each of the discount and inflation rates, which is derived
from the profile of projected benefit payments.
The expected rate of return on scheme assets is derived after
considering historical returns and assuming that asset classes with
higher volatility generate higher returns (consistent with widely
accepted capital market principles). The overall expected return on
assets is then derived by aggregating the expected return for each
asset class over the actual asset allocation.
It has been assumed that post--retirement mortality is in line
with standard tables PNA00 with a scaling factor of 105% being
applied, allowing for future improvements in line with the long
cohort improvement factors, subject to a minimum improvement from
2007 onwards of 1.25% p.a. and 0.75% p.a. for males and females
respectively. Under these assumptions, the average life expectancy
from retirement for a member currently aged 40 retiring at age 60
is 31.2 years and 32.3 years for male and female members
respectively.
The economic value of the PGL Pension Scheme assets as at 31
December 2011 amounted to GBP1,589 million (2010: GBP1,326 million)
and the economic value of the surplus amounted to GBP355 million
(2010: GBP133 million). For financial reporting purposes the
carrying value of the insurance policies effected by the PGL
Pension Scheme with the Group have been eliminated on
consolidation, resulting in reported assets of the PGL Pension
Scheme as at 31 December 2011 of GBP1,511 million (2010: GBP1,252
million) and a reported surplus of GBP277 million (2010: GBP59
million).
The amounts recognised in the income statement are as
follows:
2011 2010
GBPm GBPm
--------------------------------- ----- -----
Current service cost (3) (4)
Interest cost (63) (63)
Expected return on scheme assets 66 63
Past service cost 11 -
Gain on curtailment 7 -
--------------------------------- ----- -----
18 (4)
================================= ===== =====
The net actuarial gains recognised in other comprehensive income
comprise the following:
2011 2010
GBPm GBPm
-------------------------------------------------------------------------- ----- -----
Actual return less expected return on scheme assets 327 81
Experience loss arising on scheme liabilities (15) (23)
Loss due to changes in assumptions underlying scheme liabilities (25) (19)
-------------------------------------------------------------------------- ----- -----
287 39
Change in provision for tax on the economic surplus available as a refund (117) (32)
-------------------------------------------------------------------------- ----- -----
170 7
-------------------------------------------------------------------------- ----- -----
The cumulative net actuarial gains recognised in other
comprehensive income amounted to GBP253 million (2010: GBP83
million).
The surplus recognised in the statement of financial position is
as follows:
2011 2010
GBPm GBPm
-------------------------------------------- ------- -------
Fair value of scheme assets 1,511 1,252
Present value of defined benefit obligation (1,234) (1,193)
-------------------------------------------- ------- -------
277 59
-------------------------------------------- ------- -------
The actual return on the scheme assets comprises the
following:
2011 2010
GBPm GBPm
---------------------------------------------------- ----- -----
Expected return on scheme assets 66 63
Actual return less expected return on scheme assets 327 81
---------------------------------------------------- ----- -----
393 144
---------------------------------------------------- ----- -----
The change in the present value of the defined benefit
obligation is as follows:
2011 2010
GBPm GBPm
--------------------- ----- -----
At 1 January 1,193 1,130
Current service cost 3 4
Interest cost 63 63
Past service cost (11) -
Curtailment gain (7) -
Actuarial losses 40 42
Benefits paid (47) (46)
--------------------- ----- -----
At 31 December 1,234 1,193
--------------------- ----- -----
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:
2011 2010
GBPm GBPm
---------------------------------------------------------------- ----- -----
At 1 January 1,252 1,126
Expected return on scheme assets 66 63
Actual return less expected return on scheme assets 327 81
Provision for tax on the economic surplus available as a refund (117) (32)
Contributions by the employer 30 60
Benefits paid (47) (46)
---------------------------------------------------------------- ----- -----
At 31 December 1,511 1,252
---------------------------------------------------------------- ----- -----
The distribution of the scheme assets at the end of the year was
as follows:
2011 2010
GBPm GBPm
---------------------------------------------------------------- ----- -----
Bonds 1,443 1,128
Properties 117 123
Cash and other 100 33
Provision for tax on the economic surplus available as a refund (149) (32)
---------------------------------------------------------------- ----- -----
1,511 1,252
---------------------------------------------------------------- ----- -----
Contributions totalling GBP23 million are expected to be paid
into the scheme in 2012.
Table of historical information:
2011 2010 2009
GBPm GBPm GBPm
------------------------------------------------ ------- ------- -------
Fair value of scheme assets 1,511 1,252 1,126
Defined benefit obligation (1,234) (1,193) (1,130)
------------------------------------------------ ------- ------- -------
Surplus/(deficit) 277 59 (4)
------------------------------------------------ ------- ------- -------
Experience gains on scheme assets 327 81 23
------------------------------------------------ ------- ------- -------
Experience (losses)/gains on scheme liabilities (15) (23) 18
------------------------------------------------ ------- ------- -------
33. Intangible assets
2011
Present
value of
Acquired future
Goodwill in-force business profits Total
GBPm GBPm Customer relationships GBPm GBPm GBPm
----------------------------------- -------- ------------------ --------------------------- --------- -----
Cost or valuation
At 1 January 115 2,213 445 42 2,815
Revaluation - - - (19) (19)
----------------------------------- -------- ------------------ --------------------------- --------- -----
At 31 December 115 2,213 445 23 2,796
----------------------------------- -------- ------------------ --------------------------- --------- -----
Amortisation
At 1 January - 197 25 - 222
Charge for the year - 134 18 - 152
----------------------------------- -------- ------------------ --------------------------- --------- -----
At 31 December - 331 43 - 374
----------------------------------- -------- ------------------ --------------------------- --------- -----
Carrying amount
At 31 December 115 1,882 402 23 2,422
----------------------------------- -------- ------------------ --------------------------- --------- -----
Amount recoverable after 12 months 115 1,755 384 23 2,277
----------------------------------- -------- ------------------ --------------------------- --------- -----
2010 (restated)
Present
value of
Goodwill Acquired future Total
Restated in-force business profits Restated
GBPm GBPm Customer relationships GBPm GBPm GBPm
----------------------------------- --------- ------------------ --------------------------- --------- ---------
Cost or valuation
At 1 January - as restated 115 2,213 445 35 2,808
Revaluation - - - 7 7
----------------------------------- --------- ------------------ --------------------------- --------- ---------
At 31 December 115 2,213 445 42 2,815
----------------------------------- --------- ------------------ --------------------------- --------- ---------
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 115 2,016 420 42 2,593
----------------------------------- --------- ------------------ --------------------------- --------- ---------
Amount recoverable after 12 months 115 1,881 402 42 2,402
----------------------------------- --------- ------------------ --------------------------- --------- ---------
Goodwill
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 2016
and beyond, reflect the anticipated run--off of the Phoenix Life
insurance business.
Future cash flows have been valued using a discount rate of
10.0% (2010: 9.5%) for the Ignis Asset Management business and a
discount rate of 6.7% (2010: 9.5%) for the management services
business of the Phoenix Life segment.
Impairment tests have been performed using assumptions which
management consider reasonable. Given the magnitude of the excess
of the value in use over carrying value, management believes that
it is unlikely that there would be a change in key assumptions such
that carrying value would exceed value in use.
The carrying amount of goodwill allocated to the Phoenix Life
segment is GBP58 million (2010: GBP58 million) and to the Ignis
Asset Management segment is GBP57 million (2010: GBP57
million).
Acquired in--force business
Acquired in--force business 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. This intangible is being
amortised in accordance with the run--off of the book of business
within the Phoenix Life segment.
The acquired in--force business is allocated to the Phoenix Life
segment.
Customer relationships
The first part of the customer relationships intangible relates
to 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 GBP297 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 GBP130 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 10.0% (2010: 9.6%). The institutional
mandate IMCs had a value at acquisition of GBP18 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.
PVFP on non--participating business in the with--profit fund
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. Revaluation of PVFP is charged or
credited to the consolidated income statement as appropriate.
34. Property, plant and equipment
2011 2010
GBPm GBPm
---------------------------- ----- -----
Cost or valuation
At 1 January 39 36
Additions 7 3
Disposals (2) -
---------------------------- ----- -----
At 31 December 44 39
---------------------------- ----- -----
Depreciation and impairment
At 1 January (5) (2)
Charge for the year (3) (3)
Impairment (8) -
---------------------------- ----- -----
At 31 December (16) (5)
---------------------------- ----- -----
Carrying amount
---------------------------- ----- -----
At 31 December 28 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.
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 Group's main
operating site in Wythall is owned by one of the Group's
with--profit funds. During 2011, an agreement in principle was
reached for the purchase of that site by one of the Group's
management services companies. A valuation was undertaken in
connection with the sale and has resulted in an impairment of GBP8
million being recognised in the Phoenix Life segment.
35. Investment property
2011 2010
GBPm GBPm
----------------------------------- ----- -----
At 1 January 1,732 1,915
Additions 102 139
Improvements 9 12
Disposals (31) (421)
Gains on adjustments to fair value 4 87
----------------------------------- ----- -----
At 31 December 1,816 1,732
----------------------------------- ----- -----
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 GBP221 million (2010: GBP235
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. The acquisition of these investment properties was
financed by the Property Reversions loan as detailed in note
22.
Direct operating expenses (included within administrative
expenses) in respect of investment properties that generated rental
income during the year amounted to GBP4 million (2010: GBP2
million). The direct operating expenses arising from investment
property that did not generate rental income during the year
amounted to GBP2 million (2010: GBP2 million).
36. Financial assets
2011 2010
GBPm GBPm
------------------------------------------------------ ------ ------
Loans and receivables at amortised cost 3,529 2,293
Financial assets at fair value through profit or loss
Held for trading - derivatives 6,099 3,197
Designated upon initial recognition
Equities 11,078 12,460
Fixed and variable rate income securities 42,010 40,899
Collective investment schemes 6,251 7,144
------------------------------------------------------ ------ ------
68,967 65,993
------------------------------------------------------ ------ ------
Amount recoverable after 12 months 40,303 39,758
------------------------------------------------------ ------ ------
The fair value of loans and receivables at amortised cost
amounted to GBP3,494 million (2010: GBP2,320 million).
37. Financial instrument fair value hierarchy
37.1 Determination of fair value and fair value hierarchy of
financial instruments
Level 1 financial instruments.
The fair value of financial instruments traded in active markets
(such as publicly traded securities and derivatives) is based on
quoted market prices at the period end. The quoted market price
used for financial assets is the current bid price on the trade
date. If the bid price is unavailable a 'last traded' approach is
adopted. For units in unit trusts and shares in open ended
investment companies, fair value is by reference to published bid
values.
Level 2 financial instruments.
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.
Level 3 financial instruments.
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.
37.2 Fair value hierarchy of financial instruments measured at
fair value
2011
Total
Level 1 Level 2 Level 3 fair value
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ ------- ------- ------- -----------
Financial assets at fair value
Derivatives - 6,038 61 6,099
============================================================================== ======= ======= ======= ===========
Financial assets designated at fair value through profit or loss upon initial
recognition
Equities 10,222 42 814 11,078
Fixed and variable rate income securities 31,592 9,556 862 42,010
Collective investment schemes 4,976 1,043 232 6,251
------------------------------------------------------------------------------ ------- ------- ------- -----------
46,790 10,641 1,908 59,339
Total financial assets at fair value 46,790 16,679 1,969 65,438
------------------------------------------------------------------------------ ------- ------- ------- -----------
Total
Level 1 Level 2 Level 3 fair value
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ ------- ------- ------- -----------
Financial liabilities at fair value
Derivatives - 4,292 - 4,292
------------------------------------------------------------------------------ ------- ------- ------- -----------
Financial liabilities designated at fair value through profit or loss upon
initial recognition
Investment contract liabilities - 7,978 - 7,978
Borrowings - 217 - 217
Net asset value attributable to unitholders 3,040 - 169 3,209
------------------------------------------------------------------------------ ------- ------- ------- -----------
3,040 8,195 169 11,404
Total financial liabilities at fair value 3,040 12,487 169 15,696
------------------------------------------------------------------------------ ------- ------- ------- -----------
2010
Total
Level 1 Level 2 Level 3 fair value
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ ------- ------- ------- -----------
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
------------------------------------------------------------------------------ ------- ------- ------- -----------
Total
Level 1 Level 2 Level 3 fair value
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ ------- ------- ------- -----------
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 unitholders 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
------------------------------------------------------------------------------ ------- ------- ------- -----------
37.3 Level 3 financial instrument sensitivities
Included in Level 3 investments are two property investment
structures with a value of GBP66 million (2010: GBP96 million) and
GBP102 million (2010: GBP117 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 GBP36 million (2010: GBP36 million) and in the worst
case scenario the fair value would decrease by GBP38 million (2010:
GBP63 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 GBP23 million (2010: GBP23 million) and
a reduction in yields of 25bps would increase the value by GBP25
million (2010: GBP25 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
2011
From From
Level 1 to Level 2 Level 2 to Level 1
GBPm GBPm
---------------------------------------------------------------------------- ------------------- -------------------
Financial assets at fair value
---------------------------------------------------------------------------- ------------------- -------------------
Financial assets designated at fair value through profit or loss upon
initial recognition
Fixed and variable rate income securities 1,181 186
---------------------------------------------------------------------------- ------------------- -------------------
2010
From From
Level 1 to Level 2 to
Level 2 Level 1
GBPm GBPm
------------------------------------------------------------------------------------------ ----------- -----------
Financial assets at fair value
------------------------------------------------------------------------------------------ ----------- -----------
Financial assets designated at fair value through profit or loss upon initial recognition
Fixed and variable rate income securities 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.
All the Group's Level 2 assets have been valued using standard
market pricing sources, which have not changed during 2011.
However, following consultation with our investment managers and
pricing providers, we have updated our criteria for an active
market, particularly with reference to corporate bonds, and hence
have classified some assets as Level 2 when they would have been
Level 1 in previous periods.
The Group saw an improvement in the liquidity of the fixed and
variable rate securities market throughout 2011, 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.
37.5 Movement in Level 3 financial instruments measured at fair
value
2011
Transfers Unrealised losses
At 1 Total gains/ from on assets
January (losses) in income Purchases Level 1 held at end
2011 statement and sales and Level 2 At 31 December 2011 of year
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Financial assets
Derivative assets 89 (17) (11) - 61 (243)
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Financial assets
designated at fair
value through
profit or loss upon
initial recognition
Equities 793 29 (10) 2 814 (2)
Fixed and
variable rate
income
securities 747 9 (3) 109 862 (1)
Collective
investment
schemes 316 (2) (82) - 232 (1)
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
1,856 36 (95) 111 1,908 (4)
Total financial
assets 1,945 19 (106) 111 1,969 (247)
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Transfers Unrealised gains on
At 1 Total from liabilities
January gains/(losses) Purchases Level 1 held at end
2011 in income statement and sales and Level 2 At 31 December 2011 of year
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Financial
liabilities
Derivative
liabilities 11 (11) - - - -
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Financial
liabilities
designated at fair
value through
profit or loss upon
initial recognition
Net asset
value
attributable
to
unitholders 168 1 - - 169 44
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Total financial
liabilities 179 (10) - - 169 44
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
2010
Unrealised
Transfers gains/(losses) on
At 1 Total gains/ (to)/from assets
January (losses) in income Purchases Level 1 held at end
2010 statement and sales and Level 2 At 31 December 2010 of year
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
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
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
Transfers Unrealised gains on
At 1 Total from liabilities
January gains/(losses) Purchases Level 1 held at end
2010 in income statement and sales and Level 2 At 31 December 2010 of year
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
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
------------------- -------- ------------------- ---------- ------------ ------------------- -------------------
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
2011 the Group saw a decrease in observable inputs leading to an
increase in Level 3 financial instruments.
38. Stock lending and collateral
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 2011 that have not been
derecognised amounted to fixed and variable rate income securities
of GBP10,924 million (2010: GBP9,994 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 GBP255
million (2010: GBP648 million).
Where the Group receives collateral in the form of cash it is
recognised in the statement of consolidated financial position
along with a corresponding liability to repay the amount of the
collateral received. The amount recognised as a financial asset and
a financial liability at 31 December 2011 is GBP10,823 million
(2010: GBP9,222 million) and GBP10,916 million (2010: GBP9,339
million) respectively.
The maximum exposure to credit risk in respect of stock lending
transactions is GBP10,924 million (2010: GBP9,994 million) of which
credit risk of GBP10,913 million (2010: GBP9,714 million) is
mitigated through the use of collateral arrangements.
Collateral and pledges
Assets accepted
It is the Group's practice to obtain collateral to mitigate the
counterparty risk related to over--the--counter ('OTC') derivatives
and reinsurance 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, it is not recognised in the statement of
consolidated financial position. The fair value of financial assets
accepted as collateral for OTC derivatives and reinsurance
transactions but not recognised in the statement of consolidated
financial position amounts to GBP371 million and GBP2,089 million
respectively (2010: GBP313 million and GBP1,898 million).
Where the Group receives collateral on OTC derivatives and
reinsurance transactions 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 collateral received,
disclosed as 'Obligations for the repayment of collateral received'
and 'Deposits received from reinsurers' respectively. The amounts
recognised as financial liabilities from cash collateral received
at 31 December 2011 are set out below.
OTC derivatives Reinsurance transactions
----------------- --------------------------
2011 2010 2011 2010
GBPm GBPm GBPm GBPm
-------------------- -------- ------- ------------ ------------
Financial liability 2,089 821 472 419
-------------------- -------- ------- ------------ ------------
The maximum exposure to credit risk in respect of OTC derivative
assets is GBP6,045 million (2010: GBP3,154 million) of which credit
risk of GBP5,871 million (2010: GBP2,893 million) is mitigated by
use of collateral arrangements (which are settled net after taking
account of any OTC derivative liabilities owed to the
counterparty).
Credit risk on exchange traded derivative assets of GBP54
million (2010: GBP43 million) is mitigated through regular merging
and the protection offered by the exchange.
Assets pledged
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 consolidated financial position. The value of assets pledged at
31 December 2011 in respect of OTC derivative liabilities of
GBP4,268 million (2010: GBP2,411 million) amounted to GBP236
million (2010: GBP500 million).
Collateral has also been pledged and charges granted in respect
of certain of the Group's borrowings as set out in note 22. In
addition, the Trustees of the Pearl Group Staff Pension Scheme have
been granted certain charges as set out in note 32.
39. Other receivables
2011 2010
GBPm GBPm
----------------------------------- ----- -----
Investment broker balances 95 69
Other debtors 105 105
----------------------------------- ----- -----
200 174
----------------------------------- ----- -----
Amount recoverable after 12 months - -
----------------------------------- ----- -----
40. Cash and cash equivalents
2011 2010
GBPm GBPm
---------------------------------------------------------- ------ -----
Bank and cash balances 1,713 2,101
Short--term deposits (including demand and time deposits) 10,010 7,087
---------------------------------------------------------- ------ -----
11,723 9,188
---------------------------------------------------------- ------ -----
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 GBP11,387 million (2010: GBP8,545 million)
are primarily held for the benefit of policyholders and so are not
generally available for use by the owners.
41. Cash flows from operating activities
2011 2010
GBPm GBPm
------------------------------------------------------------------- ------- -------
(Loss)/profit for the year before tax (4) 11
Non--cash movements in profit for the year before tax
Fair value gains on:
Investment property (4) (87)
Financial assets (1,572) (3,324)
Change in fair value of borrowings 20 12
Depreciation of property, plant and equipment 3 3
Impairment of owner occupied property 8 -
Amortisation of intangible assets 152 165
Change in present value of future profit 19 (7)
Change in unallocated surplus (16) 143
Share--based payment charge/(income) 4 (3)
Interest expense on borrowings 251 269
Net expected return on pension assets 11 18
Other gains on pension schemes (37) -
Foreign currency exchange gains - (10)
Decrease/(increase) in investment assets 1,400 (1,308)
Increase in reinsurance assets (201) (69)
Increase in insurance contract and investment contract liabilities 450 423
Increase/(decrease) in deposits received from reinsurers 53 (12)
Increase in obligation for repayment of collateral received 2,845 6,054
Net decrease in working capital 310 1,114
------------------------------------------------------------------- ------- -------
Cash generated by operations 3,692 3,392
------------------------------------------------------------------- ------- -------
42. Capital statement
Capital Management Framework
The Group's Capital Management Framework is designed to achieve
the following objectives:
-- provide appropriate security for policyholders and meet all
regulatory capital requirements whilst not retaining unnecessary
excess capital;
-- ensure sufficient liquidity to meet obligations to
policyholders and other creditors; and
-- optimise the overall gearing to ensure an efficient capital
base.
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 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.
Regulatory capital requirements
Each UK life company and the Group 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.
Pillar 1
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.
An alternative test to the RCR 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').
Pillar 2
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').
Insurance Groups' Directive ('IGD')
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 capital adequacy assessment is made at the highest
EEA level insurance Group holding company, which is PLHL. PLHL is a
subsidiary of the Company.
Regulatory capital position statement
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 has a number of internal loan arrangements in place,
which allow the Group to provide capital support to other areas of
the business. In addition to these internal loan arrangements, the
Group has in place a number of internal reinsurance contracts which
are structured to manage the capital position between certain life
funds.
The available capital resources in each part of the business are
generally subject to restrictions as to their availability to meet
requirements that may arise elsewhere in the Group. The principal
restrictions are:
With--profit funds - any available surplus held in each fund can
only be used to meet the requirements of the fund itself or be
distributed to policyholders and owners. In 90:10 with--profit
funds, policyholders are entitled to at least 90% of the
distributed profits while owners receive the balance. In 100:0
with--profit funds, policyholders are entitled to 100% of the
distributed profits. Any distribution to the owners would be
subject to a tax charge which, for some funds, would be deducted
from the amount received by owners.
Non--participating funds - any available surplus held in these
funds is attributable to owners. Capital within the
non--participating funds may be made available to meet capital
requirements elsewhere in the Group subject to meeting regulatory
and legal requirements, and after consideration of the internal
capital requirements of the relevant fund and company. Any transfer
of surplus may give rise to a tax charge subject to availability of
tax relief elsewhere in the Group.
The primary source of capital used by the Group is equity
shareholders' funds and borrowings. The capital statement and
movement analysis that follows presents information about the
capital resources for the Group's UK life businesses.
2011
Other activities
and
consolidation
Non- Phoenix Life Total Phoenix adjustments Group
With--profit (see participating owners' funds Life business (note 4) total
below) GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----------------- ----------------- ---------------- ---------------- ---------------- ------
Owners' funds held
outside
long--term fund - - 1,688 1,688 (763) 925
Owners' funds held
in long--term
fund - 727 - 727 - 727
================== ================= ================= ================ ================ ================ ======
Total owners'
funds at 31
December 2011 - 727 1,688 2,415 (763) 1,652
---------------- ------
Adjustments onto a
regulatory basis:
Unallocated
surplus 843 5 - 848
Adjustments
to assets
(note 1) (34) (251) (535) (820)
Adjustments
to
liabilities
(note 2) 3,667 (141) 33 3,559
Other qualifying
capital:
Subordinated
debt (note
3) - - 645 645
Contingent
loans 412 (73) (209) 130
------------------ ----------------- ----------------- ---------------- ----------------
Total available
capital resources
at 31 December
2011 4,888 267 1,622 6,777
------------------ ----------------- ----------------- ---------------- ----------------
With--profit
2011
Pearl WPF PLL PWP PLL BWP SMA WPF SPL WPF Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------ --------- ------- ------- ------- ------- ----- -----
Owners' funds held outside long--term fund - - - - - - -
Owners' funds held in long--term fund - - - - - - -
------------------------------------------------------ --------- ------- ------- ------- ------- ----- -----
Total owners' funds at 31 December 2011 - - - - - - -
Adjustments onto a regulatory basis:
Unallocated surplus 280 148 218 52 57 88 843
Adjustments to assets (note 1) (1) (1) (4) - (1) (27) (34)
Adjustments to liabilities (note 2) 841 710 782 275 655 404 3,667
Other qualifying capital:
Contingent loans - - - - - 412 412
------------------------------------------------------ --------- ------- ------- ------- ------- ----- -----
Total available capital resources at 31 December 2011 1,120 857 996 327 711 877 4,888
------------------------------------------------------ --------- ------- ------- ------- ------- ----- -----
2010
Other
activities and
consolidation
With--profit Total Phoenix adjustments (note Group
(see below) Non- participating Phoenix Life Life business 4) total
GBPm GBPm owners' funds GBPm GBPm GBPm GBPm
------------------- ------------ ------------------ ------------------- -------------- ------------------ ------
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 PLL PWP PLL BWP SMA WPF SPL WPF Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- --------- ------- ------- ------- ------- ----- -----
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:
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
------------------------------------------- --------- ------- ------- ------- ------- ----- -----
Notes
1 Regulatory adjustments to assets reflect adjustments to
derecognise inadmissible assets such as intangibles and deferred
tax assets as well as those adjustments that are necessary where
asset and counterparty exposures exceed the prescribed regulatory
limits.
2 Regulatory adjustments to liabilities primarily reflect
differences between the realistic valuation basis for the
with--profit business used in calculating owners' funds on an IFRS
basis, and the regulatory valuation basis used to calculate the FSA
peak 1 capital resources.
3 Of the GBP645 million (2010: GBP645 million) subordinated debt
attributed to the Phoenix Life segment of the Group GBP445 million
(2010: GBP445 million) is internal to the Group, comprising GBP250
million (2010: GBP250 million) provided to Pearl Assurance Limited
and GBP195 million provided to Phoenix & London Assurance
Limited which was transferred to PLL on 1 January 2011 following a
Part VII transfer. The remaining GBP200 million (2010: GBP200
million) is external subordinated debt, see note 22 for
details.
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.
An analysis of the movement in available capital resources for
the period 1 January 2011 to 31 December 2011 is shown below:
With--profit
---------------------------------------------------- ============== ======== =========
Phoenix Total
Life Phoenix
Non- owners' Life
Pearl PLL PWP PLL BWP SMA WPF SPL WPF Other participating funds business
WPF GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- --------- ------- ------- ------- ------- ----- ============== ======== =========
Total available
capital resources
at 1 January 2011 1,048 963 1,032 295 713 1,023 709 1,441 7,224
Regular surplus 44 54 (12) 56 7 51 137 - 337
Investment return 554 302 178 217 130 705 5 69 2,160
Cost of bonus (119) (184) (83) (55) (74) (81) - 51 (545)
Changes in methodology
and assumptions:
Longevity 2 33 (2) 3 3 11 (32) - 18
Expenses 22 5 3 1 (46) 24 1 - 10
Persistency - - - - - (13) (1) - (14)
Other - 15 - 12 (1) 69 12 - 107
Management actions:
Dividends paid
by
Phoenix Life - - - - - - - (585) (585)
New business and
other factors:
Intragroup capital
movement - - (31) - - (222) (581) 834 -
Valuation rate
of interest (441) (331) (89) (201) (88) (690) - - (1,840)
Adjustment for
internal loans
in excess of counterparty
limits - - - - - - (2) (182) (184)
Other 10 - - (1) 67 - 19 (6) 89
--------------------------- --------- ------- ------- ------- ------- ----- -------------- -------- ---------
Total available
capital resources
at 31 December
2011 1,120 857 996 327 711 877 267 1,622 6,777
--------------------------- --------- ------- ------- ------- ------- ----- -------------- -------- ---------
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 Total
Life Phoenix
Non- owners' Life
Pearl PLL PWP PLL BWP SMA WPF SPL WPF Other participating funds business
WPF GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- --------- ------- ------- ------- ------- ----- -------------- -------- ---------
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
--------------------------- --------- ------- ------- ------- ------- ----- -------------- -------- ---------
Changes in methodology and assumptions
Changes to capital resources arising from changes in methodology
and assumptions occur in the normal course of the assumption
setting process and reflect changes in available data inputs.
Management actions
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 2011 generally comprise
payment of dividends to Group entities.
43. Risk management
The Group's overall approach to risk management is described in
the Performance section of the Annual Report and Accounts
43.1 Risk and capital management objectives
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 its various cash flow
requirements. Subject to this, the Group seeks to use available
capital to achieve increased 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.
43.2 Asset liability management ('ALM') framework
The use of financial instruments naturally exposes the Group to
the risks associated with them, mainly, market risk, credit risk
and financial soundness risk. Financial soundness risk is a broad
risk category encompassing financial control and reporting risk,
capital management risk, liquidity and funding risk, and tax risk.
Liquidity and funding risk are the most relevant of the financial
soundness risks for financial instruments.
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 actuarial function holder 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 actuarial function holder 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, including the activities of the Group's Treasury
function.
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 insurance 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 market and credit 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.
43.3 Financial risk analysis
Transactions in financial instruments may result in the Group
assuming financial risks. These include credit risk, market risk
and financial soundness risk. Each of these are described below,
together with a summary of how the Group manages them.
43.3.1 Credit risk
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:
-- Credit risk which results from direct investment activities,
including investments in fixed and variable rate income securities,
equities, derivatives, collective investment schemes and the
placing of cash deposits; and
-- Credit risk which results indirectly from activities
undertaken in the normal course of business. Such activities
include premium payments, outsourcing contracts, reinsurance,
exposure from material suppliers and the lending of securities.
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, non--profit funds (where risks and rewards fall
wholly to shareholders), shareholders' funds and to unit--linked
funds to the extent of management fees generated by the Group.
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
GBP249 million (2010: GBP223 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
GBP292 million (2010: GBP246 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 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 dependent on the extent
to which the underlying insurance fund is relying on shareholder
support.
Quality of credit assets
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 (the S&P
rating is used in deriving the table below):
2011
B and
AAA AA A BBB BB below Non--rated Unit-linked Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ ----- ------ ----- ----- ------ ---------- ----------- ------
Loans and receivables - - 3,008 - 11 454 51 5 3,529
Derivatives - 73 5,665 - - - 183 178 6,099
Fixed and variable rate income
securities 28,722 2,478 5,015 4,107 492 425 603 168 42,010
Reinsurers' share of insurance contract
liabilities - 759 2,374 20 - - - - 3,153
Cash and cash equivalents 8,509 1,574 1,474 19 8 6 1 132 11,723
---------------------------------------- ------ ----- ------ ----- ----- ------ ---------- ----------- ------
37,231 4,884 17,536 4,146 511 885 838 483 66,514
---------------------------------------- ------ ----- ------ ----- ----- ------ ---------- ----------- ------
2010
Unit--
AAA AA A BBB BB B and below Non--rated linked Total
GBPm GBPm m GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------ ------ ------ ----- ----- ----------- ---------- ------- ------
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
-------------------------------------- ------ ------ ------ ----- ----- ----------- ---------- ------- ------
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 credit quality
of the underlying debt securities within these vehicles is managed
by the safeguards built into the investment mandates for these
vehicles.
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.
2011
Neither past
due nor Less than 30 30-90 Greater than 90
impaired days days days Impaired Unit--linked Carrying value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- --------------- ----- --------------- -------- ---------------- --------------
Loans and
receivables 3,468 - - - 56 5 3,529
Derivatives 5,921 - - - - 178 6,099
Fixed and
variable rate
income
securities 41,842 - - - - 168 42,010
Reinsurers'
share of
insurance
contract
liabilities 3,153 - - - - - 3,153
Reinsurance
receivables 257 - - - - - 257
Prepayments and
accrued income 599 - - - - - 599
Other
receivables 200 - - - - - 200
Cash and cash
equivalents 11,591 - - - - 132 11,723
---------------- --------------- --------------- ----- --------------- -------- ---------------- --------------
2010
Neither past
due nor Less than 30 30-90 Greater than 90
impaired days days days Impaired Unit--linked Carrying value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- --------------- ----- --------------- -------- ---------------- --------------
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
---------------- --------------- --------------- ----- --------------- -------- ---------------- --------------
Please refer to page 166 for additional life company asset
disclosures which include the life companies' exposure to
peripheral Eurozone debt securities. Peripheral Eurozone is defined
as Portugal, Spain, Italy, Ireland and Greece.
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.
Concentration of credit risk
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
partners. 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.
Collateral
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 (and is not carried at fair value).
43.3.2 Market risk
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 mismatch between liability profiles and the related asset
investment portfolios;
-- the investment of surplus assets including shareholder
reserves yet to be distributed, surplus assets within the
with--profit funds and assets held to meet regulatory capital and
solvency requirements; and
-- the income flow of management charges from the invested
assets of the business.
The Group manages the levels of market risk that it accepts
through an approach to investment management that determines:
-- the constituents of market risk for the Group;
-- the basis used to fair value financial assets and
liabilities;
-- the asset allocation and portfolio limit structure;
-- diversification from and within benchmarks by type of
instrument and geographical area;
-- the net exposure limits by each counterparty or group of
counterparties, geographical and industry segments;
-- control over hedging activities;
-- reporting of market risk exposures and activities; and
-- monitoring of compliance with market risk policy and review
of market risk policy for pertinence to the changing
environment.
All operations comply with regulatory requirements relating to
the taking of market risk.
Interest rate 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.
Interest rate risk is managed by matching assets and liabilities
where practicable and by entering into derivative arrangements for
hedging purposes 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 (but excludes the
impact on the Group's defined benefit pension schemes).
With--profit 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 dependent on the
existence of policyholder guarantees. 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. For unit--linked funds the risk is limited to the extent
of the management fees generated by the Group.
An increase of 1% in interest rates(1) , 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
GBP2 million (2010: a decrease of GBP103 million). A decrease of 1%
in interest rates(1) , with all other variables held constant,
would result in a decrease in profit after tax in respect of a full
financial year, and in equity, of GBP6 million (2010: an increase
of GBP78 million).
Equity, property and inflation risk
The Group has exposure 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 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, whilst
the Group also has exposure to the value of guarantees provided to
with--profit policyholders. In addition some equity investments are
held in respect of shareholders' 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 and within the Group's
ALM framework through the holding of derivatives or physical
positions in relevant assets where appropriate.
1 55bps is assumed to relate to default risk, after allowing for
additional prudence on an IFRS basis.
The sensitivity analysis for equity and property price risk
illustrates how a change in the fair value of equities and
properties affects the Group result. It takes into account the
effect of such changes in equity and property prices on all assets
and liabilities that contribute to the Group's reported profit
after tax and in equity (but excludes the impact on the Group's
defined benefit pension schemes).
A 10% decrease in equity prices, with all other variables held
constant, would result in a increase in the profit after tax in
respect of a full financial year and, in equity, of GBP16 million
(2010: a decrease of GBP22 million).
A 10% increase in equity prices, with all other variables held
constant, would result in an decrease in the profit after tax in
respect of a full financial year, and in equity, of GBP16 million
(2010: an increase of GBP21 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 GBP43 million
(2010: GBP52 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 GBP45 million
(2010: GBP51 million).
The Group is exposed to inflation risk through certain
contracts, such as annuities, which may provide for future benefits
to be paid taking account of changes in the level of inflation, and
also through the Group's cost base. The Group seeks to manage
inflation risk within the ALM framework through the holding of
derivatives, such as inflation swaps, or physical positions in
relevant assets, such as index--linked gilts, where
appropriate.
Currency risk
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 certain holdings in
overseas assets are hedged against currency risks.
Sensitivity of profit after tax and equity to fluctuations in
currency exchange rates is not considered significant at 31
December 2011, since unhedged exposure to foreign currency was
relatively low. (2010: not considered significant)
43.3.3 Financial soundness risk
Financial soundness risk is a broad risk category encompassing
financial control and reporting risk, capital management risk,
liquidity and funding risk, and tax risk.
Financial control and reporting risk is defined as the failure
of the Group to appropriately record, report or disclose financial
information. The Group has exposure to financial control and
reporting risk through the production of its Interim and Annual
Report and Accounts. The Group's subsidiaries have exposure to
financial control and reporting risk through the annual entity
report and accounts and annual regulatory reporting.
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.
Tax risk is defined as the failure of the Group to appropriately
record, report or disclose taxation information. The Group has
exposure to tax risk through the production of its Interim and
Annual Report and Accounts. The Group's subsidiaries have exposure
to tax risk through the annual entity report and accounts, annual
regulatory reporting and through the processing of policyholder tax
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:
-- liquidity risk is managed in a manner consistent with the
subsidiary company Boards' strategic objectives, risk appetite and
Principles and Practices of Financial Management ('PPFM');
-- cash flows are appropriately managed and the reputation of
the Group is safeguarded; and
-- appropriate information on liquidity risk is available to
those making decisions.
The Group's policy is to maintain sufficient liquid assets of
suitable credit quality at all times including, where appropriate,
by having 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 collective investment schemes which are either managed or
overseen by Ignis Asset Management. The collective investment
schemes have the power to restrict and/or suspend withdrawals,
which would, in turn, affect liquidity. To date, the collective
investment schemes have continued to process both investments and
realisations in a normal manner and have not imposed any
restrictions or delays.
Some of the Group's cash and cash equivalents are held through
collective investment schemes. The collective investment schemes
have the power, in an extreme stress, to restrict and/or suspend
withdrawals, which would, in turn, affect liquidity. To date, the
collective investment schemes have continued to process both
investments and realisations in a normal manner and have not
imposed any restrictions or delays.
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:
2011
1 year or less or on Greater than No fixed
demand 1-5 years 5 years term Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------------------- -------------------- --------- ------------ -------- ------
Liabilities under insurance contracts 5,041 14,279 29,932 2,548 51,800
Investment contracts 7,978 - - - 7,978
Borrowings 169 2,345 520 216 3,250
Deposits received from reinsurers 33 124 458 - 615
Derivatives 924 385 5,859 - 7,168
Net asset value attributable to unitholders 3,209 - - - 3,209
Obligations for repayment of collateral received 11,453 255 1,297 - 13,005
Reinsurance payables 33 - - - 33
Payables related to direct insurance contracts 668 39 - - 707
Accruals and deferred income 169 4 - 2 175
Other payables 623 4 - - 627
------------------------------------------------- -------------------- --------- ------------ -------- ------
2010
1 year or less
or on Greater than No fixed
demand 1-5 years 5 years term Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------------------- -------------- --------- ------------ -------- ------
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
------------------------------------------------- -------------- --------- ------------ -------- ------
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.
43.4 Unit--linked contracts
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.
43.5 Insurance risk
Insurance risk refers to the risk that the frequency or severity
of insured events may be worse than expected and includes expense
risk. The Phoenix Life segment contracts include the following
sources of insurance risk:
Mortality
* higher than expected number of death claims on
assurance products and occurrence of one or more
large claims;
Longevity
* faster than expected improvements in life expectancy
on immediate and deferred annuity products;
Morbidity
* higher than expected number of serious illness claims
or more sickness claims which last longer on income
protection policies;
Expenses * policies cost more to administer than expected;
Lapses
* the numbers of policies terminating early is
different to that expected in a way which increases
expected claims costs or expenses or reduces future
profits;
Options
* unanticipated changes in policyholder option exercise
rates giving rise to increased claims costs; and
General insurance
* higher than expected number of non--life claims on
general insurance policies and occurrence of one or
more large claims.
Objectives and policies for mitigating insurance risk
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.
The Group has a number of small books of general insurance.
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.
Sensitivities
Insurance liabilities are sensitive to changes in risk
variables, such as prevailing market interest rates, currency rates
and equity prices, since these variations alter the value of the
financial assets held to meet obligations arising from insurance
contracts and changes in investment conditions also have an impact
on the value of insurance liabilities themselves. Additionally,
insurance liabilities are sensitive to the assumptions which have
been applied in their calculation, such as mortality and lapse
rates. Sometimes allowance must also be made for the effect on
future assumptions of management or policyholder actions in certain
economic scenarios. This could lead to changes in assumed asset mix
or future bonus rates. The most significant non--economic
sensitivities arise from mortality, longevity and lapse risk.
A decrease of 5% in assurance mortality, with all other
variables held constant, would result in an increase in the profit
after tax in respect of a full year, and an increase in equity of
GBP24 million (2010: GBP23 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
GBP24 million (2010: GBP24 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
GBP191 million (2010: GBP164 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
GBP186 million (2010: GBP162 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 GBP56 million
(2010: GBP61 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 GBP51 million
(2010: GBP49 million).
43.5.1 Assumptions
Valuation of participating insurance and investment
contracts
For participating business, which is with--profit business
(insurance and investment contracts), the insurance contract
liability is calculated in accordance with the FSA's realistic
capital regime, adjusted to exclude the shareholders' share of
future bonuses and the associated tax liability as required by FRS
27 Life Assurance. This is a market consistent valuation, which
involves placing a value on liabilities similar to the market value
of assets with similar cash flow patterns.
Valuation of non--participating insurance contracts
The non-participating insurance contract liabilities are
determined using either a net premium or gross premium valuation
method.
Process used to determine assumptions
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/ Increase/
(decrease) in insurance liabilities 2011 (decrease) in insurance liabilities 2010
GBPm GBPm
---------------------------------- ---------------------------------------- ----------------------------------------
Change in longevity assumptions (72) (43)
Change in persistency assumptions 18 35
Change in expenses assumptions (25) 10
---------------------------------- ---------------------------------------- ----------------------------------------
Valuation interest rate
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:
2011 2010
% %
---------------- ----------- -----------
Life policies 1.82 - 3.41 2.32 - 3.64
Pension policies 1.72 - 3.80 2.67 - 4.46
---------------- ----------- -----------
Expense inflation
Expenses are assumed to increase at the rate of increase in the
Retail Price Index ('RPI') plus fixed margins in accordance with
the various management service agreements ('MSAs') the Group has in
place with outsourced partners. For with--profit business the rate
of RPI inflation is determined within each stochastic scenario. For
other business it is based on the Bank of England inflation spot
curve. For MSAs with contractual increases set by reference to
national average earnings inflation, this is approximated as RPI
inflation plus 1%. In instances in which inflation risk is not
mitigated, a further margin for adverse deviations may then be
added to the rate of expense inflation.
Mortality and longevity rates
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.
Lapse and surrender rates (persistency)
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.
Discretionary participating bonus rate
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.
Policyholder options and guarantees
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 GBP2,248 million
(2010: GBP1,541 million) and GBP59 million (2010: GBP20 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 GBP409 million (2010: GBP329 million) and
GBP22 million (2010: GBP20 million) respectively.
With--profit 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.
43.5.2 Managing product risk
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.
2011
Gross Reinsurance
--------------------------------------------- ---------------------------------------------
Investment contracts Investment contracts
Insurance contracts with DPF Insurance contracts with DPF
GBPm GBPm GBPm GBPm
------------------------ ------------------- ------------------------ ------------------- ------------------------
With--profit funds:
Pensions:
Deferred annuities -
with guarantees 9,823 79 795 -
Deferred annuities -
without guarantees 1,930 105 - -
Immediate annuities 3,651 - 688 -
Unitised with--profit 1,202 9,033 3 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
Total pensions 16,606 9,217 1,486 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
Life:
Immediate annuities 101 - 6 -
Unitised with--profit 859 832 2 -
Life with--profit 6,083 - 11 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
Total life 7,043 832 19 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
Other 1,992 7 135 -
Non--profit funds:
Deferred annuities -
with guarantees 75 - - -
Deferred annuities -
without guarantees 643 6 - -
Immediate annuities 11,351 - 1,195 -
Protection 663 - 279 -
Unit--linked 1,801 1,220 12 -
Other 343 1 27 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
40,517 11,283 3,153 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
2010
Gross Reinsurance
--------------------------------------------- ---------------------------------------------
Investment contracts Investment contracts
Insurance contracts with DPF Insurance contracts with DPF
GBPm GBPm GBPm GBPm
------------------------ ------------------- ------------------------ ------------------- ------------------------
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 -
------------------------ ------------------- ------------------------ ------------------- ------------------------
With--profit fund (unitised and traditional)
The Group operates a number of with--profit funds in the UK in
which the with--profit policyholders benefit from a discretionary
annual bonus (guaranteed once added in most cases) and a
discretionary final bonus. Non--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 and other asset classes in such proportions as is
appropriate to the investment risk exposure of the fund and its
capital resources.
The Group has significant discretion regarding investment
policy, bonus policy and early termination values. The process for
exercising discretion in the management of the with--profit funds
is set out in the PPFM for each with--profit fund and is overseen
by with--profit committees. Advice is also taken from the
with--profit actuary of each company which has a with--profit fund.
Compliance with the PPFM is reviewed annually and reported to the
FSA and policyholders.
The bonuses are designed to distribute to policyholders a fair
share of the return on the assets in the with--profit funds
together with other elements of the experience of the fund. The
shareholders of the Group are entitled to receive one--ninth of the
cost of bonuses declared for some funds and GBPnil for others.
Unitised and traditional with--profit policies are exposed to
equivalent risks, the main difference being that unitised
with--profit policies purchase notional units in a with--profit
fund whereas traditional with--profit policies do not. Benefit
payments for unitised policies are then dependent on unit prices at
the time of a claim, although charges may be applied. A unitised
with--profit fund price is typically guaranteed not to fall and
increases in line with any discretionary bonus payments over the
course of one year.
Deferred annuities
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.
Immediate annuities
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.
Market and credit risk is influenced by the extent to which the
cash flows 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.
Protection
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.
Market and credit risk is influenced by the extent to which the
cash flows 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.
44. Operating leases
Operating lease rentals charged within administrative expenses
amounted to GBP16 million (2010: GBP7 million).
The Group has commitments under non--cancellable operating
leases as set out below:
2011 2010
GBPm GBPm
-------------------------------------------- ----- -----
Not later than 1 year 15 11
Later than 1 year and no later than 5 years 56 41
Later than 5 years 35 47
-------------------------------------------- ----- -----
The principal operating lease commitments concern office space
located at Bothwell Street, Glasgow; St Vincent Street, Glasgow;
Juxon House, London and Cheapside, London.
45. Commitments
2011 2010
GBPm GBPm
---------------------------------------------------------------- ----- -----
To subscribe to private equity funds and other unlisted assets 356 409
To purchase, construct or develop investment property 61 80
For repairs, maintenance or enhancements of investment property 1 2
To acquire property, plant and equipment - 2
---------------------------------------------------------------- ----- -----
46. Related party transactions
The Group has related party transactions with its pension
schemes and its key management personnel.
Transactions with pension schemes
During the year the Group entered into the following
transactions with its pension schemes:
Transactions 2011 Balances outstanding 2011 Transactions 2010 Balances outstanding 2010
GBPm GBPm GBPm GBPm
-------------------------- ----------------- ------------------------- ----------------- -------------------------
Pearl Group Staff Pension
Scheme
-------------------------- ----------------- ------------------------- ----------------- -------------------------
Investment management fees 0.6 0.2 0.5 0.7
Payment of administrative
expenses (4.0) - (3.0) -
-------------------------- ----------------- ------------------------- ----------------- -------------------------
(3.4) 0.2 (2.5) 0.7
-------------------------- ----------------- ------------------------- ----------------- -------------------------
PGL Pension Scheme
-------------------------- ----------------- ------------------------- ----------------- -------------------------
Investment management fees 2.4 0.8 2.2 0.8
-------------------------- ----------------- ------------------------- ----------------- -------------------------
The Pearl Scheme has invested in collective investment schemes
that are controlled by the Group. At 31 December 2011 the Pearl
Scheme held 1,118,197 units (2010: 1,118,197 units) in the Ignis
Systematic Strategies Fund and 53,243,341 units (2010: 147,928,525
units) in the Ignis Liquidity Fund. The value of these investments
at 31 December 2011 was GBP169 million (2010: GBP168 million) and
GBP53 million (2010: GBP148 million) respectively.
Information on other transactions with the pension schemes is
included in note 32.
Transactions with key management personnel
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:
2011 2010
GBPm GBPm
-------------------------------------- ----- -----
Salary and other short--term benefits 4.8 4.1
Equity compensation plans 2.2 3.1
Termination payments 0.7 0.5
-------------------------------------- ----- -----
Details of the shareholdings and emoluments of individual
Directors are provided in the Remuneration report.
47. Contingent liabilities
During the year, the FSA completed its review of the
categorisation of working capital to owners' funds relating to a
transaction in 2006 by London Life Limited. The FSA concluded that
no changes to the categorisation were required.
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 an immaterial contingent liability in
this regard.
48. Group entities
As at 31 December 2011, the principal subsidiary undertakings of
the Group are as follows:
Country of incorporation and principal Class of shares held (wholly--owned
place of operation unless otherwise indicated)
-------------------------------------- -------------------------------------- --------------------------------------
Insurance companies
BA (GI) Limited (general insurance
company) UK Ordinary shares of GBP0.05
London Life Limited (life assurance
company) UK Ordinary shares of GBP1
National Provident Life Limited (life
assurance company UK Ordinary shares of GBP1
NPI Limited (life assurance company UK Ordinary shares of GBP1
Pearl Assurance Limited (life 'A' ordinary shares of GBP0.05 'B'
assurance company) UK ordinary shares of GBP1
PA (GI) Limited (general insurance Ordinary shares of GBP0.01 deferred
company) UK shares of GBP0.25
Phoenix Life Limited (life assurance
company) UK Ordinary shares of GBP1
Scottish Mutual International Limited
(life assurance company) ROI Ordinary shares of EUR1.25
Non--insurance companies
Ignis Asset Management Limited
(investment management company) UK Ordinary shares of GBP1
Ignis Fund Managers Limited (unit
trust management company) UK Ordinary shares of GBP1
Ignis Investment Services Limited
(investment management company) UK Ordinary shares of GBP1
'A' ordinary shares of GBP1, 'B'
ordinary shares of GBP1 'C' ordinary
Impala Holdings Limited (holding shares of GBP1 and 'D'
company) UK ordinary shares of GBP1
Mutual Securitisation plc (finance ROI Quasi subsidiary
company)
NP Life Holdings Limited (holding 'A' ordinary shares of GBP1 and 'B'
company) UK ordinary shares of GBP1
'A' ordinary shares of GBP1 'B'
Opal Reassurance Limited (reassurance ordinary shares of GBP1 and Preference
company) Bermuda shares of GBP1
PGH (LCA) Limited (finance company) UK Ordinary shares of GBP1
PGH (LCB) Limited (finance company) UK Ordinary shares of GBP1
Ordinary shares of GBP1 and Preference
PGH (LC1) Limited (finance company) UK shares of GBP1
Ordinary shares of GBP1 and Preference
PGH (LC2) Limited (finance company) UK shares of GBP1
Ordinary shares of GBP1 and Preference
PGH (MC1) Limited (finance company) UK shares of GBP1
-------------------------------------- -------------------------------------- --------------------------------------
Country of incorporation and principal Class of shares held (wholly--owned
place of operation unless otherwise indicated)
-------------------------------------- -------------------------------------- --------------------------------------
Ordinary shares of GBP1 and Preference
PGH (MC2) Limited (finance company) UK shares of GBP1
'A' ordinary shares of GBP1 and
PGH (TC1) Limited (holding company) UK Preference shares of GBP1
'A' ordinary shares of GBP1 and
PGH (TC2) Limited (holding company) UK Preference shares of GBP1
Pearl Group Holdings (No. 1) Limited
(finance company) UK Ordinary shares of GBP0.05
Pearl Group Holdings (No. 2) Limited
(holding company) UK Ordinary shares of GBP1
Pearl Life Holdings Limited (holding
company) UK Ordinary shares of GBP1
Pearl Group Services Limited
(management services company) UK Ordinary shares of GBP1
PGS 2 Limited (finance company) UK Ordinary shares of GBP1
Pearl Group Management Services
Limited (management services company) UK Ordinary shares of GBP1
Phoenix Life Holdings Limited (holding
company) UK Ordinary shares of GBP1
UK Commercial Property Trust Limited
(property fund) Guernsey 66% of ordinary shares of GBP0.25
-------------------------------------- -------------------------------------- --------------------------------------
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.
49. Events after the reporting period
On 22 March 2012 the Board recommended a final dividend of
GBP0.21 per share (2010: GBP0.21 per share) for the year ended 31
December 2011. Payment of the final dividend is subject to
compliance with the processes set out in the Group's main credit
facilities and shareholder approval at the AGM. The cost of this
dividend has not been recognised as a liability in the financial
statements for 2011 and will be charged to the statement of changes
in equity in 2012.
R Sandler C Bannister 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, Jersey
22 March 2012
Asset disclosures
In this section
166 Additional life company asset disclosures
ADDITIONAL LIFE COMPANY ASSET DISCLOSURES
Additional life company asset disclosures The analysis of the
asset portfolio provided below comprises the assets held by the
Group's life companies including stock lending collateral. It
excludes other Group assets such as cash held in the holding and
service companies and Ignis; the assets held by the non-controlling
interest in collective investment schemes and UKCPT; and are net of
derivative liabilities.
The following table provides an overview of the exposure by
asset category of the Group's life companies' shareholder and
policyholder funds:
31 December 2011
Shareholder
and non-profit Participating1 Participating2
funds1 supported non-supported Unit-linked2 Total3
Carrying value GBPm GBPm GBPm GBPm GBPm
-------------------------- --------------- --------------- -------------- ------------ ------
Cash and cash equivalents 3,280 965 7,493 1,035 12,773
Debt securities - gilts 3,202 1,883 12,093 886 18,064
Debt securities - bonds 7,570 2,279 10,099 870 20,818
Equity securities 390 17 6,631 7,436 14,474
Property investments 153 184 759 306 1,402
Other investments4 1,687 (79) 4,173 35 5,816
-------------------------- --------------- --------------- -------------- ------------ ------
As at 31 December 2011 16,282 5,249 41,248 10,568 73,347
-------------------------- --------------- --------------- -------------- ------------ ------
1 Includes assets where shareholders of the life companies bear the investment risk.
2 Includes assets where policyholders bear most of the
investment risk. In the second half of 2011 two with-profit funds
moved from 'Participating supported' to 'Participating
non-supported' as they no longer require shareholder support.
3 This information is presented on a look through basis to underlying funds where available.
4 Includes repurchase loans of GBP3,003 million, policy loans of
GBP15 million, other loans of GBP41 million, net derivatives of
GBP1,797 million and other investments of GBP960 million.
30 June 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Carrying value GBPm GBPm GBPm GBPm GBPm
-------------------------- --------------- ------------- -------------- ----------- ------
Cash and cash equivalents 2,650 2,144 5,441 1,007 11,242
Debt securities - gilts 2,974 4,632 7,742 891 16,239
Debt securities - bonds 7,127 5,355 7,783 885 21,150
Equity securities 401 818 6,621 8,438 16,278
Property investments 153 132 887 339 1,511
Other investments1 799 586 1,895 12 3,292
-------------------------- --------------- ------------- -------------- ----------- ------
As at 30 June 2011 14,104 13,667 30,369 11,572 69,712
-------------------------- --------------- ------------- -------------- ----------- ------
1 Includes repurchase loans of GBP1,772 million, policy loans of
GBP17 million, other loans of GBP30 million, net derivatives of
GBP509 million and other investments of GBP964 million.
31 December 2010 comparatives have not been provided. It was
considered more relevant to instead provide an update on the
exposures disclosed at 30 June 2011, which were detailed in the
Group's 2011 Interim Report.
The following table analyses by type the debt securities of the
life companies:
31 December 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Analysis by type of debt securities GBPm GBPm GBPm GBPm GBPm
-------------------------------------- --------------- ------------- -------------- ----------- ------
Gilts 3,202 1,883 12,093 886 18,064
Other government and supranational(1) 1,460 670 2,151 169 4,450
Corporate - financial institutions 2,230 666 3,603 206 6,705
Corporate - other 3,547 481 3,112 480 7,620
Asset backed securities ('ABS') 333 462 1,233 15 2,043
-------------------------------------- --------------- ------------- -------------- ----------- ------
As at 31 December 2011 10,772 4,162 22,192 1,756 38,882
-------------------------------------- --------------- ------------- -------------- ----------- ------
1 Includes debt issued by governments; public and statutory
bodies; government backed institutions and supranationals.
30 June 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Analysis by type of debt securities GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------------- ------------- -------------- ----------- ------
Gilts 2,974 4,632 7,742 891 16,239
Other government and supranational 1,438 1,259 1,531 197 4,425
Corporate - financial institutions 2,088 2,025 2,745 251 7,109
Corporate - other 3,358 1,338 2,163 424 7,283
Asset backed securities 243 733 1,344 13 2,333
------------------------------------ --------------- ------------- -------------- ----------- ------
As at 30 June 2011 10,101 9,987 15,525 1,776 37,389
------------------------------------ --------------- ------------- -------------- ----------- ------
The life companies' debt portfolio was GBP38.9 billion at 31
December 2011. Shareholders had direct exposure to GBP14.9 billion
of these assets (including supported participating funds), of which
95% of rated securities were investment grade. The shareholders'
credit risk exposure to the non-supported participating funds is
primarily limited to the shareholders' share of future bonuses.
Shareholders' credit risk exposure to the unit-linked funds is
limited to the level of asset manager fee which is dependent on the
underlying assets.
Sovereign and supranational debt represented 48% of the debt
portfolio in respect of shareholder exposure, or GBP7.2 billion, at
31 December 2011. The vast majority of the life companies' exposure
to sovereign and supranational debt holdings is to UK gilts.
The following table sets out a breakdown of the life companies'
sovereign and supranational debt security holdings by country:
31 December 2011
Shareholder
and non-profit Participating Participating
Analysis of sovereign and supranational debt funds supported non-supported Unit-linked Total
security holdings by country GBPm GBPm GBPm GBPm GBPm
------------------------------------------------- --------------- ------------- -------------- ----------- ------
UK 3,211 1,884 12,112 887 18,094
European Investment Bank 525 365 862 57 1,809
USA 35 16 34 30 115
Germany 673 245 936 29 1,883
France 119 - 72 5 196
Netherlands 27 - 24 3 54
Portugal - - - - -
Italy 1 - 93 6 100
Ireland - - 2 - 2
Greece - - - - -
Spain - 8 36 2 46
Other - non-Eurozone 10 25 34 30 99
Other - Eurozone 61 10 39 6 116
------------------------------------------------- --------------- ------------- -------------- ----------- ------
As at 31 December 2011 4,662 2,553 14,244 1,055 22,514
------------------------------------------------- --------------- ------------- -------------- ----------- ------
30 June 2011
Shareholder
Analysis of sovereign and supranational debt and non-profit Participating Participating
security holdings funds supported non-supported Unit-linked Total
by country GBPm GBPm GBPm GBPm GBPm
------------------------------------------------- --------------- ------------- -------------- ----------- ------
UK 2,974 4,632 7,742 891 16,239
European Investment Bank 524 573 612 78 1,787
USA 40 134 89 28 291
Germany 636 431 591 32 1,690
France 56 10 35 4 105
Netherlands 33 10 31 5 79
Luxembourg - - - 4 4
Portugal - - 10 - 10
Italy 89 24 90 9 212
Ireland 2 - - - 2
Greece - - - - -
Spain 22 24 21 2 69
Other 36 53 52 35 176
------------------------------------------------- --------------- ------------- -------------- ----------- ------
As at 30 June 2011 4,412 5,891 9,273 1,088 20,664
------------------------------------------------- --------------- ------------- -------------- ----------- ------
At 31 December 2011, the life companies had GBP9 million
shareholder exposure to sovereign debt of the Peripheral Eurozone,
defined as Portugal, Italy, Ireland, Greece and Spain. This
exposure has been reduced from GBP161 million at 30 June 2011. This
reduction of GBP152 million reflects a decision to dispose of
Peripheral Eurozone sovereign debt in certain funds and also
includes GBP40 million arising from the reclassification of two
with-profit funds from 'Participating supported' to 'Participating
non-supported'.
All of the life companies' debt securities are held at fair
value through profit or loss under IAS 39, and therefore already
reflect any reduction in value between the date of purchase and the
balance sheet date.
The life companies have in place a comprehensive database that
consolidates credit exposures across counterparties, geographies
and business lines. This database is used for credit monitoring,
stress testing and scenario planning. The life companies continue
to manage their balance sheets prudently and have taken extra
measures to ensure their market exposures remain within risk
appetite. With effect from 31 December 2011, the European
government bond benchmarks have been strengthened for funds with
non-discretionary mandates.
The following table sets out a breakdown of the life companies'
financial institution corporate debt security holdings by
country:
31 December 2011
Shareholder
and non-profit Participating Participating
Analysis of financial institution corporate debt funds supported non-supported Unit-linked Total
security holdings by country GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
UK 1,171 504 1,962 126 3,763
USA 326 73 447 18 864
Germany 46 1 58 - 105
France 143 20 287 12 462
Netherlands 313 46 559 40 958
Portugal - - - - -
Italy 5 3 16 - 24
Ireland 68 1 9 - 78
Greece - - - - -
Spain 10 1 23 1 35
Other - non-Eurozone 90 14 147 5 256
Other - Eurozone 58 3 95 4 160
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
As at 31 December 2011 2,230 666 3,603 206 6,705
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
30 June 2011
Shareholder
Analysis of financial institution corporate debt and non-profit Participating Participating
security holdings funds supported non-supported Unit-linked Total
by country GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
UK 944 1,208 1,290 123 3,565
USA 307 272 385 22 986
Germany 78 7 51 - 136
France 195 75 219 25 514
Netherlands 228 121 306 57 712
Portugal - - - - -
Italy 35 24 38 - 97
Ireland 12 81 16 - 109
Greece - - - - -
Spain 102 65 138 10 315
Other 187 172 302 14 675
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
As at 30 June 2011 2,088 2,025 2,745 251 7,109
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
The life companies had GBP88 million shareholder exposure to
financial institution corporate debt of the Peripheral Eurozone at
31 December 2011. This exposure has been reduced from GBP319
million at 30 June 2011, a reduction of GBP231 million, of which
GBP70 million is accounted for by the reclassification of certain
holdings from Spain to the UK to better reflect the geographical
exposure and GBP48 million by the reclassification of two
with-profit funds from 'Participating supported' to 'Participating
non-supported'. The GBP2,896 million total shareholder exposure
comprised GBP2,148 million senior debt, GBP261 million Tier 1 debt
and GBP487 million Tier 2 debt.
Indirect exposure
The GBP2,896 million shareholder exposure to financial
institution corporate debt comprised GBP1,554 million bank debt and
GBP1,342 million non-bank debt.
For each of the life companies' significant financial
institution counterparties, industry and other data has been used
to assess the exposure of the individual counterparties to
Peripheral Eurozone markets. As part of the Group's risk appetite
framework and analysis of shareholder exposure to a worsening of
the Eurozone situation, this assessment has been used to identify
counterparties considered to be most at risk from Peripheral
Eurozone sovereign defaults. The financial impact on these
counterparties, and the contagion impact on the rest of the
shareholder corporate bond portfolio, is assessed under various
Eurozone scenarios and assumptions. This analysis is regularly
reviewed to reflect the latest Eurozone outlook, economic data and
changes to asset portfolios. The results are used to inform the
Group's views on whether any management actions are required.
The following table sets out a breakdown of the life companies'
corporate - other debt security holdings by country:
31 December 2011
Shareholder
and non-profit Participating Participating
Analysis of corporate - other debt security funds supported non-supported Unit-linked Total
holdings by country GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
UK 1,391 244 1,556 381 3,572
USA 787 70 357 15 1,229
Germany 56 2 65 6 129
France 408 82 342 18 850
Netherlands 403 56 374 24 857
Portugal - - - - -
Italy 67 3 71 6 147
Ireland 10 - 9 - 19
Greece 8 - 2 - 10
Spain 105 3 80 6 194
Other - non-Eurozone 95 19 129 10 253
Other - Eurozone 217 2 127 14 360
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
As at 31 December 2011 3,547 481 3,112 480 7,620
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
30 June 2011
Shareholder
and non-profit Participating Participating
Analysis of corporate - other debt security funds supported non-supported Unit-linked Total
holdings by country GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
UK 969 496 891 296 2,652
USA 650 195 289 28 1,162
Germany 287 170 181 18 656
France 392 176 253 14 835
Netherlands 102 19 41 1 163
Luxembourg 173 3 13 5 194
Portugal - - - - -
Italy 97 35 82 8 222
Ireland 30 9 16 3 58
Greece 7 - - - 7
Spain 100 50 98 15 263
Other 551 185 299 36 1,071
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
As at 30 June 2011 3,358 1,338 2,163 424 7,283
-------------------------------------------------- --------------- ------------- -------------- ----------- -----
The following table sets out a breakdown of the life companies'
ABS holdings by country:
31 December 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Analysis of ABS holdings by country GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------------- ------------- -------------- ----------- -----
UK 273 321 802 15 1,411
USA 29 - 35 - 64
Germany 5 44 139 - 188
France - 10 25 - 35
Netherlands 3 36 98 - 137
Portugal - - 2 - 2
Italy - 10 31 - 41
Ireland 18 19 48 - 85
Greece - - - - -
Spain 5 18 33 - 56
Other - non-Eurozone - 4 20 - 24
Other - Eurozone - - - - -
------------------------------------ --------------- ------------- -------------- ----------- -----
As at 31 December 2011 333 462 1,233 15 2,043
------------------------------------ --------------- ------------- -------------- ----------- -----
30 June 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Analysis of ABS holdings by country GBPm GBPm GBPm GBPm GBPm
------------------------------------ --------------- ------------- -------------- ----------- -----
UK 211 585 1,002 13 1,811
USA 19 21 17 - 57
Germany - - - - -
France - 8 19 - 27
Netherlands 13 44 121 - 178
Portugal - - - - -
Italy - 9 28 - 37
Ireland - 31 95 - 126
Spain - 14 38 - 52
Other - 21 24 - 45
------------------------------------ --------------- ------------- -------------- ----------- -----
As at 30 June 2011 243 733 1,344 13 2,333
------------------------------------ --------------- ------------- -------------- ----------- -----
The following table sets out the credit rating analysis of the
debt portfolio at 31 December 2011:
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Credit rating analysis of debt portfolio GBPm GBPm GBPm GBPm GBPm
----------------------------------------- --------------- ------------- -------------- ----------- ------
AAA 5,067 2,977 15,190 768 24,002
AA 701 264 1,005 89 2,059
A 1,997 638 2,612 148 5,395
BBB 1,615 211 2,236 197 4,259
BB 127 29 230 17 403
B and below 544 1 77 1 623
Non-rated 721 42 842 536 2,141
----------------------------------------- --------------- ------------- -------------- ----------- ------
As at 31 December 2011 10,772 4,162 22,192 1,756 38,882
----------------------------------------- --------------- ------------- -------------- ----------- ------
30 June 2011
Shareholder
and non-profit Participating Participating
funds supported non-supported Unit-linked Total
Credit rating analysis of debt portfolio GBPm GBPm GBPm GBPm GBPm
----------------------------------------- --------------- ------------- -------------- ----------- ------
AAA 4,869 6,158 8,563 712 20,302
AA 511 549 798 80 1,938
A 1731 1,427 1,822 145 5,125
BBB 1,374 708 1,336 164 3,582
BB 337 40 110 6 493
B and below 710 10 78 2 800
Non-rated 569 1,095 2,818 667 5,149
----------------------------------------- --------------- ------------- -------------- ----------- ------
As at 30 June 2011 10,101 9,987 15,525 1,776 37,389
----------------------------------------- --------------- ------------- -------------- ----------- ------
97% of rated securities were investment grade at 31 December
2011 (96%: 30 June 2011). The percentage of rated securities that
were investment grade in relation to the shareholder and
policyholder exposures were 95% and 99% respectively (94% and 99%
respectively: 30 June 2011).
MCEV Supplementary Information
The Group's primary measure of long-term shareholder value is
MCEV. MCEV remained resilient in the period, growing by GBP14
million.
In this section
173 Statement of Directors' responsibilities
174 Independent Auditor's report
175 Summarised consolidated income statement - Group MCEV basis
175 MCEV earnings per ordinary share
176 Statement of consolidated comprehensive income - Group MCEV basis
176 Reconciliation of movement in equity - Group MCEV basis
177 Group MCEV analysis of earnings
178 Reconciliation of Group IFRS equity to MCEV net worth
179 Notes to the MCEV financial statements
STATEMENT OF DIRECTORS' RESPONSIBILITIES
For the year ended 31 December 2011
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:
-- risk-free rates have been defined as the annually compounded
UK Government bond nominal spot curve plus 10 basis points rather
than as the swap rate curve;
-- the value of asset management and the management service
companies has been included on an IFRS basis; and
-- no allowance for the costs of residual non-hedgeable risk has
been made.
Further detail on these exceptions is included in note 1, Basis
of preparation.
Specifically, the Directors have:
-- determined assumptions on a realistic basis, having regard to
past, current and expected future experience and to relevant
external data, and then applied them consistently;
-- made estimates that are reasonable and consistent; and
-- provided additional disclosures when compliance with the
specific requirements of the MCEV principles is insufficient to
enable users to understand the impact of particular transactions,
other events and conditions and the Group's financial position and
financial performance.
Clive Bannister Alastair Lyons
Group Chief Executive Audit Committee Chairman
St Helier, Jersey 22 March 2012
Independent Auditor's Report to the Directors of Phoenix Group
Holdings on the Consolidated Phoenix Group Market Consistent
Embedded Value ('MCEV')
We have audited the Consolidated Phoenix Group MCEV ('Phoenix
Group MCEV') supplementary information for the year ended 31
December 2011, which comprises the Summarised consolidated income
statement - Group MCEV basis, MCEV earnings per ordinary share,
Statement of consolidated comprehensive income - Group MCEV basis,
Reconciliation of movement in equity - Group MCEV basis, Group MCEV
analysis of earnings, Reconciliation of Group IFRS equity to Group
MCEV net worth and related notes. The Phoenix Group MCEV
supplementary information has been prepared by the Directors of
Phoenix Group Holdings in accordance with the basis of preparation
set out on pages 179 to 181.
Directors' responsibilities for the Phoenix Group MCEV
supplementary information
The Directors are responsible for the preparation of this
Phoenix Group MCEV supplementary information in accordance with the
basis of preparation set out on pages 179 to 181 and for such
internal control as the Directors determine is necessary to enable
the preparation of supplementary information that is free from
material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on the Phoenix Group
MCEV supplementary information based on our audit. We conducted our
audit in accordance with International Standards on Auditing. Those
standards require us to comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether
the Phoenix Group MCEV supplementary information is free from
material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the Phoenix Group MCEV
supplementary information. The procedures selected depend on the
auditor's judgement, including the assessment of the risks of
material misstatement of the Phoenix Group MCEV supplementary
information, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Group's
preparation of the Phoenix Group MCEV supplementary information 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 Group'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
Phoenix Group MCEV supplementary information.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion the Phoenix Group MCEV supplementary information,
for the year ended 31 December 2011, has been prepared, in all
material respects, in accordance with the basis of preparation set
out on pages 179 to 181.
Basis of accounting and restriction on use
Without modifying our opinion, we draw attention to pages 179 to
181 of the Phoenix Group MCEV supplementary information, which
describe the basis of preparation. The Phoenix Group MCEV
supplementary information is prepared to comply with the basis of
preparation set out on pages 179 to 181. As a result, the Phoenix
Group MCEV supplementary information may not be suitable for
another purpose. This report, including the opinion, has been
prepared for and only for the Group's Directors as a body in
accordance with our letter of engagement dated 15 June 2011 and for
no other purpose. We do not, in giving this opinion, accept or
assume responsibility for any other purpose or to any other person
to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other matter
Ernst & Young Accountants LLP have reported separately on
the IFRS consolidated financial statements of Phoenix Group
Holdings for the year ended 31 December 2011. The information
contained in the Phoenix Group MCEV supplementary information
should be read in conjunction with the IFRS consolidated financial
statements.
Ernst & Young LLP
London
22 March 2012
SUMMARISED CONSOLIDATED INCOME STATEMENT - GROUP MCEV BASIS
For the year ended 31 December 2011
2011 2010
GBPm GBPm
----------------------------------------------- ----- -----
Life MCEV operating earnings 556 758
Management services operating profit 17 20
Ignis Asset Management operating profit 46 46
Group costs (84) (70)
----------------------------------------------- ----- -----
Group MCEV operating earnings before tax 535 754
Economic variances on life business (426) 101
Economic variances on non-life business 38 (38)
Other non-operating variances on life business (12) (54)
Non-recurring items on non-life business (9) (75)
Finance costs attributable to owners (123) (168)
----------------------------------------------- ----- -----
Group MCEV earnings before tax 3 520
----------------------------------------------- ----- -----
Tax on operating earnings (141) (211)
Tax on non-operating earnings 169 (54)
----------------------------------------------- ----- -----
Total tax 28 (265)
----------------------------------------------- ----- -----
Group MCEV earnings after tax 31 255
----------------------------------------------- ----- -----
MCEV EARNINGS PER ORDINARY SHARE
for the year ended 31 December 2011
2011 2010
GBPm GBPm
---------------------------------------- ------ ------
Group MCEV operating earnings after tax
Basic1 229.1p 363.2p
Diluted2 229.1p 363.2p
---------------------------------------- ------ ------
Group MCEV earnings after tax
Basic1 18.0p 170.6p
Diluted2 18.0p 170.6p
---------------------------------------- ------ ------
1 Based on 172 million shares (2010: 149 million) as set out in
note 15 of the IFRS consolidated financial statements.
2 Based on 172 million shares (2010: 149 million), allowing for
warrants in issue as set out in note 15 of the IFRS consolidated
financial statements.
The earnings on life business are calculated on a post-tax basis
and are grossed up at the effective rate of shareholder tax for
presentation in the income statement. The tax rate used is the UK
corporate tax rate of 26.5% (31 December 2010: 28%).
STATEMENT OF CONSOLIDATED COMPREHENSIVE
INCOME - GROUP MCEV BASIS
For the year ended 31 December 2011
2011 2010
GBPm GBPm
-------------------------------------------------------------------- ----- -----
Group MCEV earnings for the year after tax 31 255
Other comprehensive income
Actuarial gains on defined benefit pension scheme (net of tax) 1 32 27
-------------------------------------------------------------------- ----- -----
Total comprehensive income for the year 63 282
-------------------------------------------------------------------- ----- -----
1 The actuarial gain on the Pearl Group Staff Pension Scheme
reflected in the MCEV does not include the IFRS surplus at 31
December 2011.
RECONCILIATION OF MOVEMENT IN EQUITY - GROUP MCEV BASIS
For the year ended 31 December 2011
2011 2010
GBPm GBPm
----------------------------------------------------------- ----- -----
Group MCEV equity at 1 January 2,104 1,827
Total comprehensive income for the year 63 282
Issue of share capital - 33
Conversion of warrants into ordinary shares - 7
Movement in equity for equity-settled share-based payments 6 (2)
Dividends paid on ordinary shares (72) (54)
Shares issued in lieu of dividends 17 11
----------------------------------------------------------- ----- -----
Total capital and dividend flows - external (49) (5)
----------------------------------------------------------- ----- -----
Group MCEV equity at 31 December 2,118 2,104
----------------------------------------------------------- ----- -----
GROUP MCEV ANALYSIS OF EARNINGS
For the year ended 31 December 2011
Non-covered business
--------- ------------------------------------------- -----
Other
Covered Management Group
business services Asset Management companies(1) Group
MCEV IFRS IFRS IFRS MCEV
GBPm GBPm GBPm GBPm GBPm
-------------------------------------- --------- ---------- ---------------- ------------- -----
Group MCEV at 1 January 2011 4,517 80 54 (2,547) 2,104
Operating MCEV earnings (after tax) 409 13 34 (62) 394
Non-operating MCEV earnings (after
tax) (322) 15 (1) (55) (363)
-------------------------------------- --------- ---------- ---------------- ------------- -----
Total MCEV earnings 87 28 33 (117) 31
Other comprehensive income - - - 32 32
Capital and dividend flows - internal (800) (26) (19) 845 -
Capital and dividend flows - external - - - (49) (49)
Closing value at 31 December 2011 3,804 82 68 (1,836) 2,118
-------------------------------------- --------- ---------- ---------------- ------------- -----
1 Comprises the Group holding companies that do not form part of
the Phoenix Life and Ignis Asset Management divisions.
For the year ended 31 December 2010
Non-covered business
--------- ------------------------------------------- -----
Covered Management Other Group
business services Asset Management companies(1) Group
MCEV IFRS IFRS IFRS MCEV
GBPm GBPm GBPm GBPm GBPm
--------------------------------------- --------- ---------- ---------------- ------------- -----
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 comprehensive income - - - 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 GBP250 million loan asset from
Covered business to Other Group companies. This does not affect the
closing Group MCEV or MCEV earnings
Reconciliation of Group IFRS Equity to MCEV Net Worth
2011 2010
GBPm GBPm
----------------------------------------------------------------------------- ------- -------
Group net assets attributable to owners of the parent as reported under IFRS 1,652 1,580
Goodwill and other intangibles in accordance with IFRS removed (net of tax) (440) (391)
Value of in-force business in accordance with IFRS removed (net of tax) (1,289) (1,345)
Adjustments to IFRS reserving (47) (138)
Tax adjustments 8 (90)
Revalue listed debt to market value 161 94
Eliminate value of contingent loan asset1 (160) (276)
Fair value adjustments2 (43) 5
Eliminate pension scheme surpluses3 (net of tax) (380) (112)
Other adjustments 27 30
----------------------------------------------------------------------------- ------- -------
MCEV net worth attributable to owners of the parent (511) (643)
MCEV value of in-force business included (net of tax) as set out in note 2 2,629 2,747
----------------------------------------------------------------------------- ------- -------
Closing Group MCEV 2,118 2,104
----------------------------------------------------------------------------- ------- -------
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 surpluses removed are the economic
surpluses of the Pearl Group Staff Pension Scheme and PGL Pension
Scheme net of tax, as described in note 32 to the IFRS consolidated
financial statements.
NOTES TO THE MCEV FINANCIAL STATEMENTS
1. Basis of preparation
Overview
The supplementary information on pages 175 to 187 has been
prepared on a Market Consistent Embedded Value ('MCEV') basis
except for the items described further below.
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:
-- risk-free rates have been defined as the annually compounded
UK Government nominal spot curve plus 10 basis points rather than
as a swap rate curve;
-- no allowance for the cost of residual non-hedgeable risk
('CNHR') has been made because, in the opinion of the Directors,
the Group operates a robust outsourcer model in terms of
operational risk, does not write new business, is focused entirely
on the back book, and has succeeded in closing out significant
legacy risks. The theoretical value of CNHR is disclosed separately
in note 1 (b); and
-- the asset management and management service companies' values
are calculated on an IFRS basis. Under CFO Forum principles and
guidance productivity gains should not be recognised until
achieved. This treatment is inconsistent with the cost profile of a
closed fund where continual cost reductions are expected to
maintain unit costs as the business runs off. In the opinion of the
Directors, if the MCEV principles and guidance were to be applied
to the asset management and the management service companies, it
would not provide a fair reflection of the Group's financial
position. These companies are therefore reported alongside the
Group's other non-life holding companies at their IFRS net asset
value.
A gradual reduction in the UK corporation tax rate from 28% to
24% over four years was announced in the Emergency Budget of 22
June 2010 with further 1% reductions being announced in each of the
Budgets of 23 March 2011 and 21 March 2012. The Finance (No. 2) Act
2010 included the first of the 1% rate reductions with effect from
April 2011, a further 1% reduction was substantively enacted on 29
March 2011 under the Provisional Collection of Taxes Act 1968 and a
further 1% reduction was included in the Finance Act 2011. Further
reductions are to be introduced by future legislation. The 2011
MCEV includes the impact of the tax rate being reduced to 25%. The
impact of the further 3% reduction of rate is not expected to be
material.
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 Group
has been actively involved in consulting with HMRC and HM Treasury
on the detail of the new rules, with the aim of ensuring that the
Group's policyholders and shareholders are, as far as possible, not
adversely affected by the changes.
The consultation process is still ongoing in relation to certain
aspects of the new rules, and as a consequence of this and the
complexity of the proposed changes it has not been possible to
estimate their potential future impact on the Group MCEV.
Covered business
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.
MCEV methodology
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.
a) Net worth
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.
b) Value of in-force business ('VIF')
The value of in-force covered business consists of the following
components:
-- present value of future profits;
-- time value of financial options and guarantees; and
-- frictional costs of required capital.
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):
-- deterministic techniques have been used to value cash flows
whose values vary in a linear fashion with market movements. These
cash flows are valued using discount rates that reflect the risk
inherent in each cash flow. In practice, it is not necessary to
discount each cash flow at a different discount rate, as the same
result is achieved by projecting and discounting all cash flows at
risk-free rates. This is known as the 'certainty equivalent
approach'; and
-- stochastic techniques have been used to value cash flows that
have an asymmetric effect on cash flows to shareholders. Here, the
calculation involves the use of stochastic models developed for the
purposes of realistic balance sheet reporting.
Present value of future profits ('PVFP')
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.
Time value of financial options and guarantees ('TVFOGs')
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.
Frictional cost of capital ('COC')
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 128% (2010: 119%) of the minimum regulatory
capital requirement.
Solvency II will introduce a new capital regime for insurers
from the end of 2013. These disclosures do not take account of the
impact of the change in regime as this is still under
development.
CNHR
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-profit business the CNHR would increase the TVFOGs by
GBP46 million (2010: GBP64 million).
For other business the cost would be GBP130 million (2010:
GBP137 million). This equates to an equivalent average cost of
capital charge of 1.2% (2010: 1.2%). 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.
c) Valuation of debt
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-profit 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-profit 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.
d) Taxation
Full allowance has been made for the value of tax that would
become payable on the transfer of surplus assets out of non-profit
funds. This allowance reflects the projected pace of releases of
surplus from non-profit funds that is not required to support
with-profit 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.
e) New business
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.
f) Participating business
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.
g) Pension schemes
The MCEV allows for pension scheme deficits as calculated on an
IFRS basis, but no benefit is taken for pension scheme
surpluses.
2. Components of the MCEV of covered business
2011 2010
GBPm GBPm
---------- ----- -----
Net worth 1,175 1,770
---------- ----- -----
PVFP 2,846 3,022
TVFOG (108) (113)
COC (109) (162)
---------- ----- -----
Total VIF 2,629 2,747
---------- ----- -----
3,804 4,517
---------- ----- -----
The net worth of covered business of GBP1,175 million at 31
December 2011 (2010: GBP1,770 million) consists of GBP11 million of
free surplus in excess of required capital which includes the
capital required under the Group's capital management policy (2010:
GBP670 million). This does not include the IFRS net assets of
management services of GBP82 million (2010: GBP80 million) as shown
in the free surplus reconciliation for Phoenix Life on page 25.
3. Analysis of covered business MCEV earnings (after tax)
Total Life
Net worth VIF MCEV
GBPm GBPm GBPm
--------------------------------------------------- --------- ----- ----------
Life MCEV at 1 January 2011 1,770 2,747 4,517
New business value 7 6 13
Expected existing business contribution (reference
rate)1 65 115 180
Expected existing business contribution (in excess
of reference rate)2 33 41 74
Transfer from VIF to net worth 212 (212) -
Experience variances 122 59 181
Assumption changes (28) 10 (18)
Other operating variances 8 (29) (21)
Life MCEV operating earnings 419 (10) 409
Economic variances (272) (41) (313)
Other non-operating variances (4) (5) (9)
Total Life MCEV earnings 143 (56) 87
Capital and dividend flows (738) (62) (800)
--------------------------------------------------- --------- ----- ----------
Life MCEV at 31 December 2011 1,175 2,629 3,804
--------------------------------------------------- --------- ----- ----------
1 Expected existing business contribution (reference rate)
represents the expected return on the opening MCEV at the long-term
risk-free rate.
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.
Total Life
Net worth VIF MCEV
GBPm GBPm GBPm
---------------------------------------------------------------------- --------- ----- ----------
Life MCEV at 1 January 2010 2,234 2,497 4,731
New business value 16 3 19
Expected existing business contribution (reference rate) 102 122 224
Expected existing business contribution (in excess of reference rate) 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
---------------------------------------------------------------------- --------- ----- ----------
4. New business
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 MCEV MCEV/
GBPm GBPm Premium
---------------------------- ------- ----- --------
Year ended 31 December 2011 274 13 5%
---------------------------- ------- ----- --------
Year ended 31 December 2010 388 19 5%
---------------------------- ------- ----- --------
5. Maturity profile of business
This note sets out how the PVFP is expected to emerge into net
worth over future years. Surpluses are projected on a certainty
equivalent basis with allowance for liquidity premiums as
appropriate and are discounted at risk-free rates.
Years
----------------------------------------
1-5 6-10 11-15 16-20 20+ Total
Present value of future profits (PVFP) GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ----- ----- ----- ----- ----- -----
31 December 2011 1,135 683 455 291 282 2,846
--------------------------------------- ----- ----- ----- ----- ----- -----
31 December 2010 1,147 848 488 271 268 3,022
--------------------------------------- ----- ----- ----- ----- ----- -----
6. Assumptions
Reference rates
(a) Risk-free rates
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:
2011 2010
----------------------------- -----------------------------
Term Gilt Yield +10bps Swap yield Gilt Yield +10bps Swap yield
--------- ----------------- ---------- ----------------- ----------
1 year 0.32% 1.09% 0.73% 0.88%
5 years 1.14% 1.61% 2.51% 2.69%
10 years 2.20% 2.32% 3.79% 3.70%
15 years 2.85% 2.79% 4.37% 4.08%
20 years 3.21% 3.02% 4.58% 4.17%
--------- ----------------- ---------- ----------------- ----------
The swaps rates above are only applicable to sensitivity (16) as
disclosed in note 7.
(b) Liquidity premiums
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:
2011 2010
-------------------------------------- ----- -----
Additional yield over risk-free rates 0.90% 0.48%
-------------------------------------- ----- -----
Inflation
For purposes of the MCEV calculation, the rate of increase in
the UK Retail Price Index ('RPI') as at 31 December 2011 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
2011 (2010: RPI + 100 basis points).
Stochastic economic assumptions
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 2011. The scenario generator and
calibration are consistent with those 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
------------------------ ----- ----- ----- ----- ----- -----
2011 Swap term (years)
5 28.1% 19.5% 17.6% 16.1% 16.4% 16.2%
10 24.1% 18.0% 16.2% 15.3% 15.4% 14.9%
20 21.2% 16.1% 14.8% 13.8% 13.5% 13.0%
30 20.0% 15.0% 13.4% 12.3% 12.0% 11.5%
------------------------ ----- ----- ----- ----- ----- -----
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%
------------------------ ----- ----- ----- ----- ----- -----
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
-------------------------------- ----- ----- ----- ----- ----- -----
2011 25.8% 27.2% 27.5% 27.7% 27.8% 27.9%
================================ ===== ===== ===== ===== ===== =====
2010 24.3% 26.1% 26.4% 26.7% 26.8% 27.0%
-------------------------------- ----- ----- ----- ----- ----- -----
Best estimate levels of volatility are assumed for directly held
property. The model implied volatility for 2011 is 15% (2010:
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.
Operating earnings
The Group uses normalised investment returns in calculating the
expected existing business contribution. 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 calculates 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:
2011 2010
--------- ---- ----
Equities 3.0% 3.0%
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.
Expenses
Each life company's projected per policy expenses are based on
existing management services agreements with the Group's management
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.
Valuation of debt and non-controlling interests
The Group's consolidated balance sheet as at 31 December 2011
includes Perpetual Reset Capital Securities with principal
outstanding of GBP425 million (2010: GBP425 million) and
subordinated debt with a face value of GBP200 million (2010: GBP200
million). 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:
2011 2010
------------------------------------------ -------------------------------------------
Face value (including accrued
Face value (including Market value interest) Market value
accrued interest) GBPm GBPm GBPm GBPm
----------------------------- ---------------------------- ------------ ----------------------------- ------------
Listed debt and
non-controlling interests
Perpetual Reset Capital
Securities 444 256 444 304
Subordinated debt 211 139 211 170
----------------------------- ---------------------------- ------------ ----------------------------- ------------
Unlisted debt has been included at face value:
2011 2010
Face value Face value
GBPm GBPm
------------------------------------ ----------- -----------
Unlisted debt
Pearl and Impala facilities 2,471 2,639
Royal London PIK notes and facility 111 106
------------------------------------ ----------- -----------
7. Sensitivity to assumptions
The table below summarises the key sensitivities of the MCEV of
covered business at 31 December 2011:
2011 2010
Life MCEV Life MCEV
GBPm GBPm
---------------------------------------------------------------------------- ---------- ----------
(1) Base 3,804 4,517
(2) 1% decrease in risk-free rates 153 183
(3) 1% increase in risk-free rates (157) (167)
(4) 10% decrease in equity market values (75) (105)
(5) 10% increase in equity market values 71 102
(6) 10% decrease in property market values (72) (77)
(7) 10% increase in property market values 72 76
(8) 100bps increase in credit spreads1 (241) (267)
(9) 100bps decrease in credit spreads 277 250
(10) 25% increase in equity/property implied volatilities (20) (35)
(11) 25% increase in swaption implied volatilities (11) (23)
(12) 25% decrease in lapse rates and paid-up rates (43) (21)
(13) 5% decrease in annuitant mortality (203) (166)
(14) 5% decrease in non-annuitant mortality 27 35
(15) Required capital equal to the minimum regulatory capital2 32 31
(16) Swap curve as reference rate, retaining appropriate liquidity premiums (50) (272)
---------------------------------------------------------------------------- ---------- ----------
1 44bps 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.
Additional information
In this section
189 Shareholder information
193 Glossary
Shareholder information
Annual General Meeting
Our Annual General Meeting will be held on 3 May 2012 at
1pm.
The voting results for our 2012 AGM, including proxy votes and
votes withheld, will be available on the Group's website shortly
after the meeting.
Shareholder profile as at 31 December 2011
Analysis of shareholders No. of shareholders % No. of shares %
---------------------------- ------------------- ------ ------------- ------
Individual 110 22.04 3,542,735 2.03
Banks and nominee companies 343 68.74 116,405,042 66.72
Insurance companies 7 1.40 9,828,198 5.63
Other entities 39 7.82 44,696,840 25.62
---------------------------- ------------------- ------ ------------- ------
Total 499 100.00 174,472,815 100.00
---------------------------- ------------------- ------ ------------- ------
Range of shareholdings No. of shareholders % No. of shares %
---------------------- ------------------- ------ ------------- ------
1-1,000 127 25.45 65,077 0.04
1,001-5,000 82 16.43 217,305 0.12
5,001-10,000 46 9.22 328,569 0.19
10,001-250,000 155 31.06 10,522,777 6.03
250,001-500,000 24 4.81 8,605,215 4.93
500,001 and above 65 13.03 154,733,872 88.69
---------------------- ------------------- ------ ------------- ------
Total 499 100.00 174,472,815 100.00
---------------------- ------------------- ------ ------------- ------
Shareholder services
Managing your shareholding
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.
Registrar details
Computershare Investor Services (Jersey) Limited Queensway House
Hilgrove Street St Helier Jersey JE1 1ES
Shareholder helpline number +44 (0) 870 707 4040
Fax number +44 (0) 870 873 5851
Shareholder helpline e-mail address info@computershare.co.je
Dividend mandates
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.
Scrip dividend alternative
The Company will be offering a scrip dividend alternative in
relation to the recommended final dividend. Shareholders will be
sent an information booklet which provide details of the terms of
the scrip dividend alternative on or around 2 April 2012. The
information booklet will also be made available on the Group's
website within the investor relations section.
The information booklet will give guidance regarding how
shareholders may elect to take up the scrip dividend alternative.
Such elections must be received by the Company's registrar by 5pm
on 25 April 2012.
Warning to shareholders
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'.
Shareholders are advised to be very wary of any unsolicited
advice, offers to buy shares at a discount or offers of free
reports about 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/home.do
-- Report the matter to the FSA by calling 0845 606 1234
-- 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 also be contacted by completing an online form
available at
www.fsa.gov.uk/pages/doing/Regulated/Law/Alerts/form.shtml.
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 available at
www.fsa.gov.uk/pages/consumerinformation.
Share price
You can access the current share price of Phoenix Group Holdings
on the Group's website.
Group financial calendar for 2012
Annual General Meeting 3 May 2012
Announcement of first quarter interim
management statement 4 May 2012
Announcement of unaudited six months'
interim results 23 August 2012
Announcement of third quarter interim
management statement 31 October 2012
-------------------------------------- ---------------
Ordinary shares - 2011 final dividend
Scrip mandate forms issued 2 April 2012
Ex-dividend date 4 April 2012
Scrip calculation period 4-12 April 2012
Record date 10 April 2012
Scrip election date 25 April 2012
Payment date for the recommended final
dividend 8 May 2012
-------------------------------------- ---------------
Forward-looking statements
The 2011 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:
-- Domestic and global economic and business conditions
-- Asset prices
-- Market related risks such as fluctuations in interest rates
and exchange rates, and the performance of financial markets
generally
-- The policies and actions of governmental and/or regulatory
authorities, including, for example, new government initiatives
related to the financial crisis and the effect of the European
Union's 'Solvency II' requirements on the Group's capital
maintenance requirements
-- The impact of inflation, and deflation
-- Market competition
-- Changes in assumptions in pricing and reserving for insurance
business (particularly with regard to mortality and morbidity
trends, gender pricing and lapse rates)
-- The timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries
-- Risks associated with arrangements with third parties,
including joint ventures
-- Inability of reinsurers to meet obligations or unavailability
of reinsurance coverage
-- The impact of changes in capital, solvency or accounting
standards, and tax and other legislation and regulations in the
jurisdictions in which members of the Group operate.
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 2011 Annual Report and Accounts. The Group undertakes no
obligation to update any of the forward-looking statements
contained within the 2011 Annual Report and Accounts or any other
forward-looking statements it may make.
The 2011 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 2011 Annual
Report and Accounts should be construed as a profit forecast.
Glossary
ABI Association of British Insurers - A trade association
for 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 - a meeting which companies
with shareholders are required by law to hold
ALM Asset Liability Management - Management of mismatches
between assets and liabilities within risk appetite
Annuity policy A policy that pays out regular benefit amounts, either
immediately and for the remainder of a policyholder's
lifetime (immediate annuity), or deferred to commence
at some future date (deferred annuity)
Asset management The management of assets using a structured approach
to guide the act of acquiring and disposing of assets,
with the objective of meeting defined investment goals
and maximising value for investors, including policyholders
AST Actuarial Systems Transformation - A project set up
to rationalise and streamline the Group's actuarial
systems, models and processes into a single actuarial
modelling platform that is state of the art, scalable
and able to meet our future demands
Black-Scholes A mathematical model used to calculate the value of
an option
BREEAM Building Research Establishment Environmental Assessment
Method - a voluntary measurement rating for green buildings
that was established in the UK by the Building Research
Establishment
BSP Bonus Share Plan - A share incentive legacy plan which
operated before the Company's shares were admitted
to the LSE. No further awards will be made under this
plan
CFO Forum A high-level discussion group formed of the Chief Financial
Officers of major European listed and non-listed insurance
companies. Its aim is to discuss and influence the
development of accounting, financial reporting and
related regulatory developments in the insurance industry
on behalf of its members
Closed life fund A fund that no longer accepts new business. The fund
continues to be managed for the existing policyholders
COC Frictional Cost of Capital - 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
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
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
EBT Employee Benefit Trust - A trust set up to enable its
Trustee to purchase and hold shares to satisfy employee
share-based incentive plan awards
Economic assumptions Assumptions related to future interest rates, inflation,
market value movements and tax
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
Euronext A pan-European Stock Exchange based in Amsterdam, Holland
EV Embedded Value - The value to equity shareholders of
the net assets and expected future profits of a life
company
Expense risk The risk of financial or reputational losses arising
from unexpected timing or value of expenses incurred
Experience variances Current period differences between the actual experience
incurred and the assumptions used in the calculation
of embedded value or IFRS insurance liabilities
Financial Reporting The UK's independent regulator responsible for promoting
Council confidence in corporate governance and reporting
Free surplus The amount of capital held in life companies in excess
of that needed to support their minimum regulatory
capital requirement, which is the greater of Pillar
1 and Pillar 2 capital requirements, plus the capital
required under the Group's capital management policy
FSA Financial Services Authority - The regulatory authority
for the UK financial services industry
GAR Guaranteed Annuity Rate - A 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
capital adequacy regime for insurance groups, 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 capital adequacy regime for insurance
groups, it is the sum of the individual capital resource
requirements for each of the regulated undertakings
in the insurance group
Gearing Net shareholder debt as a percentage of the sum of
Group MCEV, net shareholder debt and the PVFP of Ignis
Group AUM Group assets under management - This represents life
company assets (excluding collateral on stock lending
arrangements), Holding Company cash and third party
assets managed by Ignis
HMRC Her Majesty's Revenue and Customs
Holding Companies Refers to Phoenix Group Holdings, Phoenix Life Holdings
Limited, Pearl Group Holdings (No. 2) Limited, Impala
Holdings Limited, Pearl Group Holdings (No. 1) Limited,
PGH (TC1) Limited, PGH (TC2) Limited, PGH (MC1) Limited,
PGH (MC2) Limited, PGH (LCA) Limited, PGH (LCB) Limited,
PGH (LC1) Limited, PGH (LC2) Limited and Pearl Life
Holdings Limited
ICA Individual Capital Assessment - A life company's assessment
of its capital requirements to ensure that assets exceed
liabilities 99.5% of the time over a 1-year period
or (in other words) to be able to withstand a one in
200 year event
IFRS International Financial Reporting Standards - Accounting
standards, Interpretations and the Framework adopted
by the International Accounting Standards Board
IGD Insurance Groups Directive - The European Directive
setting out the current capital adequacy regime for
insurance groups
IGD Excess Capital IGD surplus plus policyholder and certain shareholder
capital currently excluded under FSA rules from the
calculation of the IGD surplus. The excluded capital
relates to the surplus estate of the with-profit funds
and other restricted surplus
IGD surplus An FSA regulatory measure which calculates surplus
capital at a group level. IGD surplus is defined as
Group Capital Resources less the Group Capital Resource
Requirement
IMC Investment Management Contract - A contract between
an investor and an investment manager
In-force Long-term business written before the period end and
which has not terminated before the period end
Inherited estate The assets of the long-term with-profit funds less
the realistic reserves for non-profit policies written
into the non-profit fund, less asset shares aggregated
across the with-profit policies and any additional
amounts expected at the valuation date to be paid to
in-force policyholders in the future in respect of
smoothing costs and guarantees
IPO Initial Public Offering
LDI Liability Driven Investment - Refers to investing in
assets which move in line with the value of liabilities.
Ignis LDI strategies typically involve purchasing a
mix of government bonds and other instruments which
have similar sensitivity to interest rates and inflation
as the liabilities, to protect against changes in the
deficit between asset and liability values
LIBOR London Interbank Offer Rate - The average interbank
interest rate at which a selection of banks on the
London money market are prepared to lend to one another
Longevity risk The risk of financial or reputational losses arising
from lower than expected number of deaths experienced
on annuity products or greater than expected improvements
in annuitant mortality
LSE London Stock Exchange
LTICR Long-Term Insurance Capital Requirement - Capital required
to be held by life companies for regulatory purposes
in respect of investment, expense and insurance risks
on a Pillar 1 base
LTIP Long-Term Incentive Plan - The part of an executive's
remuneration designed to incentivise long-term value
for shareholders through an award of shares with vesting
contingent on employment and the satisfaction of stretching
performance conditions linked to Group strategy
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
MG ALFA An asset liability modelling system developed by Milliman
that forms the foundation platform for actuarial modelling
and is uniquely capable of meeting Solvency II requirements
for enhanced stochastic modelling capability
Morbidity risk The risk of financial or reputational losses arising
from higher than expected number of inceptions on critical
illness or income protection policies and lower than
expected termination rates on income protection policies
Mortality risk The risk of financial or reputational losses arising
from higher than expected death claims on assurance
products
MSA Management Services Agreement - Contracts that exists
between either Phoenix Life and management services
companies or between management services companies
and their outsourced partners
Net shareholder debt Shareholder debt (including hybrid debt) less Holding
Company cash and cash equivalents
Non-economic assumptions Assumptions related to future levels of mortality,
morbidity, persistency and expenses
Non-profit fund A fund which is not a with-profit fund (see below)
Open Ended Investment A type of company or a fund in the UK that is structured
Companies to invest in other companies with the ability to adjust
its investment criteria and fund size
Operating companies Refers to the trading companies within Phoenix Life
(which includes Opal Reassurance Limited) and all trading
companies within Ignis Asset Management
Part VII transfer The transfer of insurance policies under Part VII of
FSMA 2000. The insurers involved can be in the same
corporate group or in different groups. Transfers require
the consent of the High Court, which will consider
the views of the FSA and of an Independent Expert
Participating business These are policies for which the premiums are paid
into a separate fund and the policyholder has an entitlement
to share in the profits of that fund
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
Peripheral Eurozone Refers to Portugal, Ireland, Italy, Greece and Spain
Persistency risk The risk of financial or reputational losses arising
from adverse movements in either surrender rates or
persistency rates on policies with guaranteed benefits
leading to losses. This includes the risk of greater
than expected policyholder option exercise rates giving
rise to increased claims costs
PIK Payment-in-kind. Interest on a bond is paid other than
in cash, most commonly by increasing the principal
Pillar 1 surplus The excess of available capital resources over regulatory
capital resource requirements as mandated by the FSA
for individual insurance companies
Pillar 2 surplus The excess of available capital resources over capital
calculated on an economic basis required to ensure
entities can meet their liabilities. It is based on
a self-assessment methodology called the ICA (Individual
Capital Assessment) which is reviewed by the FSA
PPFM Principles and Practices of Financial Management -
A publicly available document which explains how a
company's with-profit business is run. As part of demonstrating
that customers are treated fairly, the Board certifies
that the PPFM has been complied with
Protection policy A policy which provides benefits payable on certain
events. The benefits may be a single lump sum or a
series of payments and may be payable on death, serious
illness or sickness
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 Resilience Capital Requirement - Additional amounts
of capital required to be held by certain life companies
for regulatory purposes as a result of two stress tests
under Pillar 1
Scrip issue The issue of new shares to existing shareholders in
lieu of a cash dividend
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 fair outcomes for customers
Total Shareholder The total return, over a fixed period, to an investor
Return in terms of both share price growth and dividends (assuming
that any dividends paid are re-invested, on the ex-dividend
date, in acquiring further shares)
UEL Useful economic life - The period over which future
economic benefits are expected to be derived from an
asset
UK Corporate Governance Standards of good corporate governance practice in
Code the UK relating to issues such as board composition
and development, remuneration, accountability, audit
and relations with shareholders
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
Unit-linked policy A policy where the benefits are determined by the market
value of the underlying assets in the unit linked fund
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)
With-profit fund A fund where policyholders are entitled to a share
of the profits of the fund. Normally, policyholders
receive their share of the profits through bonuses,
which reflect both the investment return from the assets
which premiums are invested in and other profits the
fund makes. Also known as a participating fund as shareholders
have a participating interest in the with-profit funds
and any declared bonuses. Generally, policyholder and
shareholder participation in the with-profit funds
in the UK is split 90:10
WPICC With-Profit Insurance Capital Component. The WPICC
is the amount by which the regulatory surplus exceeds
the realistic surplus
reducing our environmental impact
In line with our Corporate Responsibility programme and as part
of our desire to reduce our environmental impact, you can view key
information on our website at www.thephoenixgroup.com.
Our Investor Relations section includes information such as our
most recent news items, results presentations, annual and interim
reports, share-price performance, AGM and EGM information, FSA
returns and contact information.
To stay up-to-date with Phoenix Group news and other changes
with our site's content, you can sign up for e-mail alerts, which
will notify you when content is added. To sign up visit
www.thephoenixgroup.com/investor-relations/email-alerts.aspx
For mobile phone users we also have a useful mini-site at
http://m.thephoenixgroup.com which contains links to our latest
news items, share price, financial calendar and contact
details.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UURRRUBAOUUR
Grafico Azioni Phoenix Wts(DI) (LSE:PHNW)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Phoenix Wts(DI) (LSE:PHNW)
Storico
Da Giu 2023 a Giu 2024
