REG - Phoenix Group Hldgs - 2022 Half-Year Results
15/08/2022 07:00
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RNS Number : 9383V Phoenix Group Holdings PLC 15 August 2022
Phoenix Group Holdings plc: 2022 Interim Results 15 August 2022
Phoenix Group announces record half year 2022 results, delivering growing,
resilient cash and a 3% dividend increase
CASH RESILIENCE GROWTH
Operating companies' + Solvency II Surplus and + Incremental new business long-term cash generation
cash generation
SCCR
£430m
£950m £4.7bn and 186%
H1 2021: £206m
H1 2021: £872m FY 2021: £5.3bn and 180%
Phoenix delivered against all of its key objectives in H1, with a record set
of financial results and clear strategic progress made. We have delivered
further organic growth and also announced the cash funded acquisition of Sun
Life of Canada UK. This will support us in delivering a dividend that is
'sustainable and grows over time'.
Financial highlights
Delivering cash
· Strong first half cash generation(1) of £950m in H1 2022 (H1
2021: £872m); now confident of delivering at the top-end of our
£1.3bn-to-£1.4bn target range for the year.
Delivering resilience
· Strong balance sheet with a Solvency II Surplus of £4.7bn(2) at
30 June 2022 after a £450m debt repayment (FY 2021: £5.3bn) and a Solvency
II Shareholder Capital Coverage Ratio(2,3) ('SCCR') of 186% (FY 2021:
180%(3)).
· Our hedging and credit risk management approach limited the
Solvency II surplus economic impact to just £(0.2)bn.
· Fitch leverage ratio(4) reduced to 27% at 30 June 2022 reflecting
active deleveraging (FY 2021: 28%).
· Phoenix manages a high-quality c.£34bn shareholder credit
portfolio, which is 98% investment grade and with only 19% in BBB; our
exposure to cyclical sectors is low at only c.3% and high quality with an
average credit rating of A-.
· Phoenix has no material exposure to inflation, with our key
product and cost exposures hedged.
Delivering growth
· Record first half new business long-term cash generation of
£430m, more than double H1 2021 at £206m.
· H1 2022 new business long-term cash generation comprises £282m
from our Bulk Purchase Annuities (BPA) business (H1 2021: £80m) and £148m
from our capital-light fee-based businesses (H1 2021: £126m).
· Strong performance in the first half in BPA, with £1.6bn of
premiums contracted, a 280% increase on H1 2021 (£0.4bn). Capital strain
reduced further to 6.2% (FY 2021: 6.5%) with £102m of capital invested.
· Investment in our Workplace business has delivered clear momentum
with net inflows of £1.7bn in H1 2022 (H1 2021: £0.2bn net outflow), with 42
new schemes won in the first half, compared to 16 in H1 2021.
Announced our first ever cash funded acquisition
· Announced the acquisition, subject to regulatory approval, of Sun
Life of Canada UK for £248m, which equates to an attractive price to
shareholder Own Funds ratio of 83%.
· Expect to deliver c.£470m of incremental long-term cash
generation, with c.£125m of synergies targeted, net of costs.
· Simplified integration with their policy administration
undertaken by our strategic outsourcing partner, TCS Diligenta.
· The value and cash flow expected to be generated through this
acquisition support a sustainable 2.5% inorganic increase in the Group's
dividend, to take effect from and including the 2022 Final Dividend, subject
to completion.
Dividend approach
· The Board has declared an Interim dividend of 24.8p per share,
equal to the 2021 Final dividend, which is an increase of 3% year-on-year (H1
2021 Interim dividend: 24.1p per share), reflecting the 2021 organic dividend
increase.
· Ahead of the 2022 FY results, the Board will assess if organic
business growth can fund a further sustainable dividend increase, in addition
to the 2.5% inorganic dividend increase proposed for the Sun Life of Canada UK
acquisition.
· In future years, we intend to simplify our dividend
communications by announcing any potential dividend increase at the time of
our Full Year results, which will combine both organic and inorganic growth.
Allocating surplus capital in line with our financial framework
· Our SCCR is currently above our target range of 140-180% and we
have surplus cash to invest in line with our strategy.
· This will support us investing a total of c.£300m of capital
into BPA across 2022, funding the £248m Sun Life of Canada UK acquisition in
cash at completion, as well as enabling us to proactively deleverage including
the £450m debt redemption in July.
· Our hedging approach protects both our short and long-term cash
generation from the impacts of any market volatility, which results in Phoenix
offering a uniquely reliable dividend over the very long term, and enables us
to invest into growth with confidence.
Other key financial metrics
· Assets under administration decreased to £269bn as at 30 June
2022 (FY 2021: £310bn) due to £38bn of adverse market movements, however our
hedging approach protects our fee income to deliver resilient cash generation.
· IFRS operating profit remained strong at £507m in H1 2022 (H1
2021: £527m).
Clear progress made against our strategic priorities as we deliver on our
purpose and strategy
Optimising our in-force business
· Continued our track record of delivering Solvency II management
actions, with £421m in H1 2022, including recurring illiquid asset
origination and proactive deployment into US liquid credit to take advantage
of relative spread widening.
· Achieved the regulatory approval of our partial internal model
for our European business.
Enhancing our operating model and culture
· Successfully completed our first migration, of all 400k
annuities, from the legacy Standard Life platform to TCS.
· Realised further ReAssure integration cost synergies of £15m
p.a. during H1 2022; total ReAssure synergies of £1,078m now delivered to
date, exceeding our revised target of £1,050m.
· We are delivering on our Diversity & Inclusion ambitions,
with the proportion of women on the Group Board increasing to 54%(5) (FY 2021:
33%) and the Group Executive Committee to 42%(5) (FY 2021: 17%).
· Supporting colleagues through the cost of living challenges,
including a £1,000 net payment to our colleagues(6).
Growing our business to support both new and existing customers
· Continued to grow organically, delivering strongly for customers,
with £1.8bn of net inflows across our Open business in H1 2022, and a strong
pipeline of H2 opportunities developed in both BPA and Workplace.
Innovating to provide our customers with better financial futures
· Commenced migration of £15bn of pension assets and 1.5m members
to Standard Life's flagship sustainable fund.
· Continued to deliver on our social purpose with the launch of the
Phoenix Insights Longer Lives Index and our well-received 'guidance gap'
campaign, as we look to champion our customers' interests in support of a
better retirement.
Investing in a sustainable future
· Originated £485m of sustainable illiquid assets in the first
half (H1 2021: £788m), including £170m invested into affordable housing,
£167m into positive environmental impact projects, and £75m into healthcare
& education.
Strategic outlook
Despite the uncertain economic backdrop, we are confident about the outlook
for Phoenix's growth. Our focused strategy is designed to leverage the major
trends in the UK long-term savings and retirement market, across M&A, BPA,
Workplace and Individual Pensions & Savings. These offer Phoenix multiple,
long-term structural growth opportunities.
2022 guidance
· Expect to deliver cash generation at the top-end of our
£1.3bn-to-£1.4bn target range for the year.
· Continue to operate within our target ranges for our SCCR
(140-180%) and leverage ratio (25-30%).
· Confident of deploying our target capital allocation into BPA of
c.£300m in 2022, with £1.1bn of premiums already contracted in H2, and a
further £1.1bn of premiums in exclusive discussions, including the Pearl
Pension Scheme.
· Expect to deliver further organic growth in 2022 with incremental
new business long-term cash generation of >£800m.
· Progress the regulatory approval process for the Sun Life of
Canada UK acquisition, targeting completion in Q1 2023.
Commenting on the results, Phoenix Group CEO, Andy Briggs said:
"Phoenix has performed very strongly in the first half of the year despite the
challenging macro environment. We have once again delivered a record set of
financial results, which was underpinned by the strong progress we have made
across our strategic priorities. We have delivered strong cash generation of
£950 million and maintained our resilient balance sheet. We have also
delivered both organic growth, with £430 million of new business from our
Open business, and inorganic growth, with the announcement of our £248
million acquisition of Sun Life of Canada UK. Our 2022 Interim dividend has
increased 3% year-on-year, and we have proposed a further 2.5% increase at our
2022 Final dividend to reflect the value we expect to create with the Sun Life
of Canada UK acquisition.
We have been working tirelessly to ensure we can support our customers and
colleagues impacted by the increased cost of living - building on our
programme of activities for our most vulnerable customers and offering a range
of support to our colleagues including a one-off payment. As the UK's largest
long-term savings and retirement business, we are driven by our core social
purpose."
Enquiries
Investors/analysts:
Claire Hawkins, Director of Corporate Affairs & Investor Relations,
Phoenix Group
+44 (0)20 4559 3161
Andrew Downey, Investor Relations Director, Phoenix Group
+44 (0)20 4559 3145
Media:
Douglas Campbell, Teneo
+44 (0)7753 136 628
Shellie Wells, Corporate Communications Director, Phoenix Group
+44 (0)20 4559 3031
Presentation and financial supplement details
There will be a live virtual presentation for analysts and investors today
starting at 09:30 (BST).
A link to the live webcast of the presentation, with the facility to raise
questions, as well as a copy of the presentation and a detailed financial
supplement will be available at:
https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations
(https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations)
You can also register for the live webcast at: Phoenix Group 2022 half year
results (https://phoenixhalfyear2022.virtualhub.events/)
A replay of the presentation and transcript will also be available on our
website following the event.
Dividend details
The declared Interim dividend of 24.8p per share is expected to be paid on 12
September 2022.
The ordinary shares will be quoted ex-dividend on the London Stock Exchange as
of 25 August 2022. The record date for eligibility for payment will be 26
August 2022.
Footnotes
1. Cash generation is a measure of cash and cash equivalents, remitted by
Phoenix Group's operating subsidiaries to the holding companies and is
available to cover dividends, debt interest, debt repayments and other items.
2. 30 June 2022 Solvency II capital position is an estimated position and
reflects a dynamic recalculation of transitionals for the Group's Life
companies and recognition of the foreseeable 2022 interim shareholder dividend
of £248m. Had the dynamic recalculation not been assumed, the Solvency II
surplus and the Shareholder Capital Coverage Ratio would increase by £0.4bn
and 10% respectively.
3. The Shareholder Capital Coverage Ratio excludes Solvency II Own Funds
and Solvency Capital Requirements of unsupported with-profit funds and
unsupported pension schemes.
4. Current Fitch leverage ratio is estimated by management. Leverage ratio
is pro forma for a £450m debt repayment made in July and allowing for
currency hedges over foreign currency denominated debt.
5. Includes known hires and subject to regulatory approval.
6. £1,000 net payment to be made in August to all permanent colleagues
excluding our Top 100 leaders.
Legal Disclaimers
This announcement in relation to Phoenix Group Holdings plc and its
subsidiaries (the 'Group') contains, and the Group may make other statements
(verbal or otherwise) containing, forward-looking statements and other
financial and/or statistical data about the Group's current plans, goals,
ambitions, outlook, guidance and expectations relating to future financial
condition, performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'will', 'may',
'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward looking. Such
forward-looking statements and other financial and/or statistical data 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 the Group has 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, social, environmental and business conditions;
asset prices; market related risks such as fluctuations in interest rates and
exchange rates, the potential for a sustained low-interest rate environment,
and the performance of financial markets generally; the policies and actions
of governmental and/or regulatory authorities, including, for example,
initiatives related to the financial crisis, the COVID-19 pandemic, climate
change and the effect of the UK's version of the "Solvency II" requirements on
the Group's capital maintenance requirements; the impact of inflation and
deflation; the political, legal, social and economic effects of the COVID-19
pandemic and the UK's exit from the European Union; the direct and indirect
consequences of the Russia-Ukraine War on European and global macroeconomic
conditions; information technology or data security breaches (including the
Group being subject to cyberattacks); the development of standards and
interpretations including evolving practices in ESG and climate reporting with
regard to the interpretation and application of accounting; the limitation of
climate scenario analysis and the models that analyse them; lack of
transparency and comparability of climate-related forward-looking
methodologies; climate change and a transition to a low-carbon economy
(including the risk that the Group may not achieve its targets); 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
proposed or future acquisitions, disposals or combinations within relevant
industries; risks associated with arrangements with third parties; 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, ambitions, outlook,
guidance and expectations set out in the forward-looking statements and other
financial and/or statistical data within this announcement. The Group
undertakes no obligation to update any of the forward-looking statements or
data contained within this announcement or any other forward-looking
statements or data it may make or publish. Nothing in this announcement
constitutes, nor should it be construed as, a profit forecast or estimate.
Group Chief Executive Officer's report
Phoenix has made a fantastic start to 2022 as we continued to deliver on our
purpose and strategy, with a record set of first half financial results, and
the announcement of our first ever cash funded acquisition, of Sun Life of
Canada UK.
Phoenix has performed very strongly in the first half of the year despite the
challenging macro environment, as we have once again delivered a record set of
results, across our financial framework of cash, resilience and growth. This
was underpinned by the strong progress we have made across our wider strategic
priorities. These ensure we are delivering for our customers, colleagues and
investors, and is in line with our social purpose, enabling us to play our
wider role in society.
We continued to grow organically in the first half, as we delivered strongly
for customers, and we are also growing inorganically, with the announcement of
our first ever cash funded acquisition, of Sun Life Assurance Company of
Canada (UK) Limited ('Sun Life of Canada UK').
We have therefore delivered on all of the key objectives I had set for the
business at the start of the year, and I am delighted with the execution by
the team.
Delivering on our purpose
I passionately believe that the best businesses have a core social purpose,
and at Phoenix ours is 'helping people secure a life of possibilities'. As a
purpose-led organisation we are committed to delivering better outcomes for
all of our stakeholders, including our customers, colleagues, investors and
wider society.
We have continued to deliver for all our stakeholders in the first half, as we
executed on our five strategic priorities, which I outline in detail later in
the report. These priorities are designed to support us in delivering both our
strategy and our purpose.
We are of course very aware of the current economic backdrop and that many
people are facing significant challenges from the cost of living crisis. It is
therefore critical that we continue to focus on our social purpose at this
time.
You can therefore expect Phoenix to continue to advocate on behalf of our
customers, calling for legislative change where we believe it is important.
Our approach is increasingly informed by our longevity think tank, Phoenix
Insights, which is driving forward greater understanding and debate on some
important issues that our industry needs to respond to, given people in the UK
are living longer lives.
A strong financial performance in the first six months of 2022
During the first six months of 2022 we have delivered record first half cash
generation of £950 million (HY 2021: £872 million). We have also maintained
our resilient Solvency II ('SII') capital position with a SII Surplus of £4.7
billion (FY 2021: £5.3 billion) and increased our Shareholder Capital
Coverage Ratio ('SCCR') to 186% (FY 2021: 180%).
Our Open business has delivered record first half new business long-term cash
generation of £430 million, more than double the first half of 2021, on a
like-for-like basis (HY 2021: £206 million), thanks to a good first half
performance in Bulk Purchase Annuities ('BPA').
The ongoing resilient cash generation that we deliver has enabled the Board to
declare an Interim dividend of 24.8p per share, a 3% increase year-on-year (HY
2021: 24.1p), which reflects the organic dividend increase that we implemented
with the 2021 Final Dividend.
IFRS operating profit remained strong at £507 million (HY 2021: £527
million), but we are reporting an IFRS statutory loss after tax of £(876)
million. This primarily reflects £(1,076)m of adverse investment return
variances, which arise from our comprehensive approach of hedging the key
market risks we face, calibrated to protect our SII capital position and cash
generation, rather than the IFRS balance sheet.
Announced our first ever cash funded acquisition
We have recently announced the acquisition, subject to regulatory approval, of
Sun Life of Canada UK, a closed book UK life insurance company with c.£10
billion of assets under administration. The consideration of £248 million
equates to an attractive price to shareholder Own Funds ratio of 83%, in line
with the Board's disciplined approach to the deployment of shareholder
capital. The acquisition will be funded by our own cash resources as we invest
surplus capital to generate strong returns for our shareholders.
The acquisition is expected to deliver c.£470 million of incremental
long-term cash generation, with approximately 30% of this cash generation to
emerge in the first three years. This includes the planned delivery of c.£125
million of integration synergies, net of costs, from cost efficiencies and
capital management actions, representing c.50% of the consideration paid.
We very much look forward to welcoming the Sun Life of Canada UK customers and
colleagues to the Group. It is expected to be a simplified operational
integration programme, owing to the majority of their policy administration
already being undertaken by our strategic outsourcing partner (TCS Diligenta).
I am delighted that the value and incremental cash flow that we expect to
generate through this acquisition has enabled the Board to propose a 2.5%
inorganic increase in the Group's dividend, to take effect from and including
the 2022 Final Dividend, subject to completion. I am confident that this
transaction will demonstrate the significant value to shareholders of smaller,
cash funded M&A.
Clear progress across our strategic priorities
We have five strategic priorities which are the key programmes and initiatives
that will differentiate us, building distinctive capabilities to win in our
chosen markets, and support us in delivering on our strategy and our purpose.
We have made strong progress against all of these in the first half of 2022,
as outlined below.
Optimise our in-force business
Phoenix is the market leader in managing in-force business for cash and
resilience, which in turn underpins our sustainable dividend.
A key driver of this is our expertise in optimising for cost and capital
efficiencies, the output of which we call 'management actions'. I am therefore
pleased that we have delivered a further £421 million of management actions
in the period. This included our diversification into US credit as we took
advantage of relative spread widening compared to illiquid credit, as well as
our ongoing illiquid asset origination where we saw attractive value
opportunities, and the approval of the partial internal model for our European
business.
Meanwhile, we continue to operate our comprehensive dynamic hedging approach
which protects our SII balance sheet by hedging the majority of our market
risks, and this ensured our economic capital variance remained low, at just
£(0.2) billion, despite the volatile markets.
Enhance our operating model and culture
Phoenix is the market-leader in delivering M&A integrations and customer
migrations that realise substantial cost and capital synergies. During the
first half of 2022 we have once again demonstrated our capabilities here.
A key part of our integration journey is migrating customers from the legacy
Standard Life platform onto the modern TCS Diligenta platform. This is a
programme that has been years in the planning and so I am delighted that we
successfully transferred our first customers across in the first half of the
year, with all 400,000 Standard Life annuities safely migrated. This is both a
great outcome for customers and a key strategic milestone for our integration
programme.
We have also continued to realise synergies from the ReAssure integration,
with a further £15 million per annum of cost synergies achieved in the first
half of the year, as we progressed the Phase 2 integration of the actuarial
and finance functions. This means we have now delivered £1,078 million of
synergies to date, and have therefore exceeded our revised target of £1,050
million in just two years.
A crucial component for delivering on our purpose and strategy is attracting
and retaining the best talent. That is why we are committed to making Phoenix
the best place our colleagues have ever worked. It is therefore great to see
the continued high levels of employee engagement, with our average score
currently 7.5 of 10.
I am also pleased that we have made strong progress on increasing female
representation at the very top of the organisation. Our focus here means that
we have increased the proportion of women, including known hires, on the
Phoenix Group Board to 54% (FY21: 33%) and on my Executive Committee to 42%
(FY21: 17%).
Grow our business to support both new and existing customers
It is great to see that the investment into our growth is paying off, as we
delivered record first half new business long-term cash generation of £430
million in HY 2022, more than double HY 2021 at £206 million. We also
delivered £1.8 billion of net inflows across our Open business in the first
half, a significant improvement on the £1.1 billion of net outflows we saw in
HY 2021.
Our Retirement Solutions business was again the largest contributor with £282
million of new business long-term cash generation (HY 2021: £80 million),
having contracted £1.6 billion of BPA premiums in the first half (HY 2021:
£0.4 billion), across six transactions, as we built on our position as an
established player in the market.
I am also delighted with the turnaround in our capital-light, fee-based
businesses, with a £1.9 billion year-on-year increase in net fund flows.
Workplace was the key driver of this, which reflects the significant
investment we have made into our proposition and our ability to fully leverage
the Standard Life brand now it is in our ownership. The momentum is building
in our new scheme wins too, which will benefit future year's flows.
It is also pleasing to see that the investment in our propositions and
customer service platforms is reflected in our continued high customer
satisfaction scores, where we are once again exceeding our targets for the
year. With a Combined Group telephony customer satisfaction score of 93%
(target: 90%) and a Standard Life digital journeys satisfaction score of 94%
(target: 92%).
Innovate to provide our customers with better financial futures
Engaging and supporting people in improving their financial futures is crucial
to fulfilling our purpose of 'helping people secure a life of possibilities'.
We are helping our customers on their journey to and through retirement, which
is even more important given the current economic backdrop. We have delivered
a range of initiatives in the first half in support of this.
For instance, our think tank, Phoenix Insights, launched its inaugural Longer
Lives Index to much acclaim in March. This innovative new index is designed to
understand who is and is not confident and prepared for their financial
futures. By understanding the scale and nature of who lacks confidence in
their financial futures and why, we can begin to understand what actions need
to be taken today.
We also commenced the migration of £15 billion of pension assets, covering
1.5 million customers, to our Standard Life Sustainable Multi Asset fund. This
is a significant step forward in our ambition to support more of our customers
in their desire to invest their pensions' savings more sustainably.
We have also been busy working to develop an innovative range of retirement
income solutions as we look to create a compelling offering in the individual
pensions and savings market to support people in securing a better retirement.
Invest in a sustainable future
We have continued to invest in a sustainable future, as we respond to both the
clear customer demand, and demonstrate leadership, as a purpose-led business.
A good example of this is climate change, where we are playing a leading role
in the substantial investment the sector can make here. For instance, we
invested a further £485 million into a range of sustainable illiquid assets
in the first half, including £170m invested into affordable housing, £167m
into positive environmental impact projects, and £75m into healthcare &
education.
Phoenix also sits on the Expert Group of the Government Net Zero Transition
Plan Taskforce. The Taskforce will produce guidance on how government's
commitment to require Transition Plans should be implemented, with a Call for
Evidence to be issued shortly, and is a great example of us using our
influence to help lead the debate for the industry,
We are also an active member of the Taskforce on Nature Financial Disclosures
('TNFD') forum and are committed to integrating nature into our investment
decision making process. We look forward to taking part in the upcoming pilot
of the TNFD beta framework.
Finally, we have used our influence to encourage 60% of our key suppliers to
commit to SBTi/Race to Net Zero and are on track to meet our target of 75% by
the end of the year.
Supporting our customers and colleagues
At Phoenix we see our core social purpose as being just as important as our
business performance. We are highly aware of the pressures that people across
the UK are feeling as they have to deal with the elevated cost of living and
rising interest rates. Which is why we have been working tirelessly to ensure
we can support our customers and colleagues through the challenging economic
outlook.
For instance, we have been building on our programme of activities for our
most vulnerable customers such as our digital literacy initiatives that have
been offered to over 1 million customers. While we have also provided a
package of support to our colleagues, including a one-off £1,000 net lump sum
payable in August to all employees other than ExCo and our Top 100 leaders.
Strategic outlook
While we recognise the challenging economic backdrop and the impact this will
have for many people and businesses, Phoenix is well positioned to continue
delivering on its strategy and to support both our customers and our
colleagues.
Phoenix has a clear and differentiated strategy, which creates shareholder
value through leveraging the major market trends, and where the whole is
greater than the sum of the parts.
Heritage is the bedrock of our business, which delivers high levels of
predictable cash that covers our current dividend into the long term. And it
also generates surplus cash, that we can re-invest into both our Open
business, and into M&A, both of which can support future dividend
increases.
Phoenix is a growing business, with a defensive balance sheet, and offers a
uniquely reliable dividend, that is sustainable and grows over time.
Thank you
Our strong start to 2022 could not have been achieved without our exceptional
people and I would therefore like to thank my colleagues throughout the Group
for executing on our strategy. I look forward to Phoenix delivering another
successful six months and beyond.
Andy Briggs
Group Chief Executive Officer
Delivering cash, resilience and growth
Phoenix has delivered a strong financial performance in the first half of
2022, across our financial framework of cash, resilience and growth, and we
have announced our first cash funded acquisition, of Sun Life of Canada UK.
We have delivered record cash generation of £950 million in the first half
and are on track to deliver at the top-end of our 2022 target range of £1.3
to £1.4 billion.
We have also maintained our resilient SII balance sheet, with a SII surplus of
£4.7 billion and a Shareholder Capital Coverage Ratio of 186%, providing us
with the capacity to invest into both organic and inorganic growth. Our strong
capital position has also enabled the Group to de-leverage, with the repayment
of a £450 million Tier 3 bond that matured in July, which helped reduce our
leverage ratio to 27%. This means we are comfortably within our 25-30%
leverage ratio target range.
Our incremental new business cash generation has more than doubled year-on
year to £430 million, and with a buoyant BPA market and strong pipeline, I
have confidence that we will once again more than offset the Heritage run-off
through organic growth from our Open business in 2022.
The Board has declared an Interim dividend of 24.8p per share, which is a 3%
year-on-year increase, reflecting last year's organic increase. I am also
delighted that we have announced our first ever cash funded acquisition, of
Sun Life of Canada UK for £248 million. With the proposed 2.5% inorganic
dividend increase to be effective with our 2022 Final Dividend, subject to
completion.
The Group's IFRS operating profit remained strong at £507 million (HY 2021:
£527 million), but we are reporting an IFRS statutory loss after tax of
£(876) million. This primarily reflects £(1,076) million of adverse
investment return variances in relation to our hedging instruments. As a
reminder, our hedging approach is designed to stabilise our SII Surplus and
long-term free cash, which in turn protects our dividend capacity, but this
does cause significant IFRS volatility due to a mismatch between our IFRS
balance sheet, and the Solvency balance sheet which we are hedging. However,
we accept this as the trade-off to deliver the resilient cash generation and
dividend that Phoenix is known for.
Overall, the progress we have made in the first half demonstrates the strength
of our business model and affirms our focused strategy, as we continue to grow
our business both organically and inorganically, which in turns supports our
dividend that is sustainable and grows over time.
A strong financial performance in HY 2022
Financial performance metrics: 30 June 30 June YOY
2022
2021
change
Cash Cash generation £950m £872m +9%
New Business Incremental new business long-term cash generation £430m £206m +109%
Dividend Interim dividend per share 24.8p 24.1p +3%
IFRS Loss after tax £(876)m £(667)m -31%
Operating profit before tax £507m £527m -4%
30 June 31 December 6-mth
2022
2021
change
Balance sheet metrics:
Solvency II PGH Solvency II surplus £4.7bn £5.3bn -11%
Capital
PGH Shareholder Capital Coverage Ratio ('SCCR') 186% 180% +6%pts
Assets Assets under administration £269bn £310bn -13%
Leverage Fitch leverage ratio(1) 27% 28% -1%pt
1 Leverage ratio is pro forma for a £450m debt repayment made in July
and allowing for currency hedges over foreign currency denominated debt.
Alternative performance measures
With our financial framework designed to deliver cash, resilience and growth,
we recognise the need to use a broad range of metrics to measure and report
the performance of the Group, some of which are not defined or specified in
accordance with Generally Accepted Accounting Principles ('GAAP') or the
statutory reporting framework.
In prioritising the generation of sustainable cash flows from our operating
companies, performance metrics are monitored where they support this strategic
purpose, which includes ensuring that the Solvency II capital strength of the
Group is maintained. We use a range of alternative performance measures
('APMs') to evaluate our business, which are summarised on page 68 of the 2022
Interim Financial Report.
Cash
Cash generation & group liquidity
Operating companies' cash generation represents cash remitted by the Group's
operating companies to the holding companies.
Cash generation from the operating companies is principally used to fund the
Group's shareholder dividends, debt interest and repayments, and its various
operating costs. Any surplus remaining is available for reinvestment into
organic and inorganic growth opportunities. The cash flow analysis that
follows reflects the cash paid by the operating companies to the Group's
holding companies, as well as the uses of those cash receipts, including
support for growth opportunities.
Group cash flow analysis
£m 30 June 30 June
2022 2021
Cash and cash equivalents at 1 January 963 1,055
Net cash receipts from operating companies¹ 950 872
Uses of cash:
Operating expenses (39) (44)
Pension scheme contributions (9) (4)
Debt interest (124) (123)
Non-operating cash outflows (165) (154)
Uses of cash before debt repayments (337) (325)
and shareholder dividend
Debt repayments - (200)
Shareholder dividend (248) (241)
Total uses of cash (585) (766)
Support of BPA activity (102) (17)
Closing cash and cash equivalents at 30 June 1,226 1,144
1 Total cash receipts include £40 million received by the holding
companies in respect of tax losses surrendered (HY 2021: £40 million).
Cash receipts
Cash generated by the operating companies during the period was £950 million
(HY 2021: £872 million). The Group set a one-year target of £1.3 to £1.4
billion for 2022, and is now on track to meet the top-end of this range.
Uses of cash
Operating expenses of £39 million (HY 2021: £44 million) represent corporate
office costs, net of income earned on holding company cash and investment
balances. The slight decrease relative to 2021 reflects the delay into the
second half of certain costs associated with the development of capabilities
across our Group functions as we execute our growth strategy.
Pension scheme contributions of £9 million were made in the period (HY 2021:
£4 million), with the increase on 2021 due to the inclusion of a £4 million
contribution into the ReAssure pension scheme following a triennial review.
Debt interest of £124 million (HY 2021: £123 million) reflects interest paid
in the period on Group debt instruments.
Non-operating net cash outflows of £165 million (HY 2021: £154 million)
include £119 million of Group project expenses including transition activity
in relation to the Standard Life platform migration and £46 million of net
other items, including collateral posted and close-outs in respect of Group
hedging instruments.
Shareholder dividend
The shareholder dividend of £248 million represents the payment of the 202 1
final dividend in May. This has increased year-on-year, from £241 million,
due to the 3% organic increase announced alongside our full year 2021 results.
Support of BPA activity
Funding of £102 million (HY 2021: £17 million) has been provided to the life
companies to support the strong performance in the first half in BPA, with
£1.6 billion of premiums written.
Illustrative investment growth capacity
Looking over the period 2022-24, we expect to have significant Group cash
resources of around £5.0 billion available from our existing in-force
business. This will more than cover the Group's expected uses of £3.3 billion
for operating and integration costs, debt interest and repayments, and our
shareholder dividend cost at its new, increased level.
The Group therefore expects to generate £1.7 billion of surplus cash, with a
further c.£1 billion of additional debt capacity available within our
leverage ratio target range, totalling £2.7 billion of growth investment
capacity.
This provides us with the capacity to cash fund the £248 million acquisition
of Sun Life of Canada UK, invest our target allocation of around £300 million
into BPA in 2022, and to continue investing into future growth opportunities
over time.
Group long-term free cash (after future interest costs)
Group Long-Term Free Cash (after future interest costs) is comprised of
long-term cash generation expected to emerge from our in-force business plus
existing Group holding company cash, less an allowance for costs associated
with our M&A integration activity and a deduction for the servicing and
redemption of all shareholder debt outstanding. This totalled £11.8 billion
as at 31 December 2021 and covers our c.£0.5 billion annual dividend cost
over the very long term.
Protecting the resilience of this free cash flow is key in ensuring the
long-term sustainability of our dividend. We view the key market risks
associated with equities, interest rates and inflation as unrewarded risks, as
they could cause volatility to the value of this cash. Therefore we hedge
these risks to mitigate volatility and deliver dependable cash generation.
As a result, our hedging approach, along with the proactive management of
credit risk, means that there is no material impact on this free cash flow
from the key market risks, as shown below. This underpins the unique
resilience of Phoenix's dividend over the very long term and means we are well
positioned to continue delivering for our shareholders in an uncertain
economic environment.
Resilience
Capital management
A Solvency II capital assessment involves a valuation in line with Solvency II
principles of the Group's Own Funds and a risk-based assessment of the Group's
Solvency Capital Requirement ('SCR'). The Group's Own Funds differ materially
from the Group's IFRS equity for a number of reasons, including the
recognition of future shareholder transfers from the with-profit funds and
future management charges on investment contracts, the treatment of certain
subordinated debt instruments as capital items, and a number of valuation
differences, most notably in respect of insurance contract liabilities,
taxation and intangible assets.
Group Solvency II capital position
Our Solvency II capital position remains strong, with a resilient Solvency II
surplus of £4.7 billion, which includes the accrual for the deduction of our
2022 interim dividend, and reflects the repayment of a £450 million Tier 3
bond that matured in July.
Our Shareholder Capital Coverage Ratio ('SCCR') is 186%, which is above our
140%-to-180% target range. This provides significant capacity to invest into
both organic growth through BPA and inorganic growth such as the acquisition
of Sun Life of Canada UK.
Change in Group Solvency II surplus (estimated)
The Group Solvency II Surplus has decreased to £4.7 billion (FY21: £5.3
billion) largely due to the £450 million repayment of capital qualifying debt
that was deducted from our June solvency position.
Our ongoing surplus emergence contributed £0.4 billion and management actions
delivered £0.4 billion. We delivered strong management actions in the period,
primarily from 'business as usual' actions as we continue to optimise our
in-force business. Actions included our ongoing illiquid asset origination,
the proactive deployment into US liquid credit to take advantage of relative
spread widening and geographical diversification, as well as further balance
sheet optimisation actions. I am also delighted that we delivered the first
key action to improve the efficiency of our European business, with the
regulatory approval of our partial internal model.
Operating costs, dividends and interest totalled £(0.4) billion, and we
repaid a £450m Tier 3 bond that reduced surplus by £(0.5) billion. We also
experienced a small economic variance at just £(0.2) billion, despite the
significant movement in yields year-to-date. This reflects our comprehensive
approach of hedging the majority of our market risks, and while this causes
some volatility in Own Funds, it is designed to stabilise our Solvency II
surplus and therefore protect long-term cash generation, so is a trade-off we
accept.
We have also invested £0.1 billion of capital into growth, primarily for the
funding of £1.6 billion of BPA premiums written in the period. With a strong
pipeline for BPA in the second half, we do expect to fully invest our target
level of capital of around £300 million during 2022.
Change in SCCR (estimated)
Our SCCR has increased by 6%pts to 186% as at 30 June 2022 (FY 2021: 180%).
Ongoing surplus emerging and release of capital requirements increased the
SCCR by 10%pts, and the delivery of management actions in the period increased
the SCCR by 5%pts, with most of these actions being value generating Own Funds
actions.
In addition, there has been an 11%pts increase due to economics. While the
surplus movement was small at just £(0.2) billion due to our comprehensive
hedging strategy, this did cause volatility in the Group's Own Funds, to
offset against movements in the SCR. We have experienced a significant adverse
mark-to-market revaluation on our hedging instruments contributing to an
adverse Own Funds impact of around £1.2 billion, which is offset by a £1
billion reduction in our SCR due to economic factors, principally rising
yields, leading to the positive 11%pts ratio movement. Our hedges operated as
expected and reduced the volatility in Solvency II surplus and therefore
protected the resilience of our dividend.
Partly offsetting the positive ratio movements were the recognition of the
July repayment of the £450 million Tier 3 bond, which decreased the SCCR by
8%pts, new business strain of 2%pts, financing and corporate costs and accrual
of the 2022 dividend which reduced it by 7%pts, and a number of other smaller
items that total to a reduction of 3%pts.
Sensitivity and scenario analysis
As part of the Group's internal risk management processes, the Own Funds and
regulatory SCR are tested against a number of financial scenarios. These
sensitivities have remained broadly unchanged in the first half of 2022, with
all sensitivities remaining within risk appetite and small in the context of
the Group's £4.7 billion Solvency II surplus.
The key sensitivity we focus on here is a full letter downgrade of 20% of our
credit portfolio, which results in a £0.3 billion Solvency II surplus impact.
This credit downgrade stress has now been updated to align to the wider
industry practice of including realistic management actions if a downgrade
event were to occur, which means the Group's sensitivity is now comparable to
peers.
Given inflation is so topical at the moment, it is worth reiterating that we
have no material exposure to inflation. Inflation emerges in two principal
areas within our business, both of which we have hedged. Firstly, we have the
inflation linked annuities, which are hedged with index-linked gilts, and
secondly, we have the exposure on our policy administration and operating
costs, which we also hedge. This means that the current inflationary
environment will have no material financial impact on the Group.
Illustrative risk exposure stress testing
Estimated impact(1) on PGH Solvency II Surplus SCCR
£bn
%
Solvency II base 4.7 186
Equities: 20% fall in markets Nil 3
Long-term rates: 80bps rise in interest rates2 (0.1) 5
Long-term rates: 70bps fall in interest rates2 0.1 (3)
Long-term inflation: 70bps rise in inflation3 Nil Nil
Property: 12% fall in values4 (0.2) (3)
Credit spreads: 135bps widening with no allowance for downgrades5 (0.1) 1
Credit downgrade: immediate full letter downgrade on 20% of portfolio6 (0.3) (7)
Lapse: 10% increase/decrease in rates7 (0.1) (1)
Longevity: 6 months increase8 (0.6) (11)
1 Assumes stress occurs on 1 January 2022 and that there is no market
recovery.
2 Assumes the impact of a dynamic recalculation of transitionals and an
element of dynamic hedging which is performed on a continuous basis to
minimise exposure to the interaction of rates with other correlated risks
including longevity.
3 Stress reflects a structural change in long-term inflation with an
increase of 70bps across the curve
4 Property stress represents an overall average fall in property values
of 12%.
5 Credit stress varies by rating and term and is equivalent to an
average 135bps spread widening. It assumes the impact of a dynamic
recalculation of transitionals and makes no allowance for the cost
of defaults/downgrades.
6 Impact of an immediate full letter downgrade across 20% of the
shareholder exposure to the bond portfolio (e.g. from AAA to AA, AA to A, etc.
This sensitivity assumes management actions are taken to rebalance the annuity
portfolio back to the original average credit rating and makes no allowance
for the spread widening which would be associated with a downgrade
7 Assumes most onerous impact of a 10% increase/decrease in lapse rates
across different product groups.
8 Applied to the annuity portfolio.
Life company free surplus
Life Company Free Surplus represents the Solvency II surplus of the Life
Companies that is in excess of their Board-approved capital management
policies. It is this Free Surplus from which the life companies remit cash to
Group. As at 30 June 2022, the Life Company Free Surplus was £2.4 billion (31
December 2021: £2.6 billion).
The hedging strategy to protect surplus is reflected in the resilience of the
Free Surplus shown below. The table analyses the movement in the period.
Estimated
position as at 30 June
2022
£bn
Opening Free Surplus 2.6
Surplus generation and run-off of capital requirements 0.4
Management actions 0.4
New business strain including BPA (0.1)
Economics, financing and other -
Free Surplus before cash remittances 3.3
Cash remittances to holding companies (1.0)
Cash remittances from holding companies 0.1
Closing Free Surplus 2.4
Growth
Incremental new business long-term cash generation reflects the impact on the
Group's future cash generation arising as a result of new business transacted
in the year. It is stated on an undiscounted basis.
Assets under administration ('AUA') provide an indication of the potential
earnings capability of the Group arising from its insurance and investment
business, whilst AUA flows provide a measure of the Group's ability to deliver
new business growth.
A reconciliation from the Group's IFRS statement of consolidated financial
position to the Group's AUA is provided on page 64 of the 2022 Interim
Financial Report.
Please see the APM section on page 68 of the 2022 Interim Financial Report for
further details of these measures.
Incremental new business long-term cash generation
We have delivered incremental new business long-term cash generation of £430
million in the period, more than double the prior year on a like-for-like
basis (HY 2021: £206 million). This is a fantastic start to the year and we
are therefore on-track to more than offset the Heritage run-off once again, by
delivering organic growth with incremental cash generation of more than £800
million for 2022.
Retirement Solutions
2021 was the year that Phoenix, through our newly acquired Standard Life
brand, firmly established itself as a key player in the BPA market.
We have built on this foundation with a strong start to 2022, having completed
£1.6 billion of premiums across 6 external transactions. This has delivered
£282 million of long-term cash generation, a 253% increase on HY 2021 (which
was £80 million on a like-for-like basis). Our strain has also reduced again
from 6.5% at FY 2021 to 6.2% inclusive of our capital management policy, but
which equates to 3.8% on a pre-capital management policy basis. Despite a
competitive market, we have maintained our pricing discipline and improved
both the cash multiple and payback, leading to improved IRRs in the period.
Looking forward, we have a very strong pipeline for the second half of 2022.
We have already completed a further £1.1 billion of transactions in H2, and
we are exclusive on another £500 million transaction which will complete in
Q3. We will also buy-in the remaining c.£600 million of our Pearl Pension
Scheme in the second half.
As a result, we are confident of fully deploying our target level of capital
into BPA this year, of around £300 million.
Workplace
We have delivered incremental new business long-term cash generation of £112
million in the period, an increase of 60% on HY 2021 (HY 2021: £70 million),
noting that Workplace new business long-term cash generation is seasonally
more weighted to the first half, due to the benefit from annual salary
increases.
Customer savings and investment ('CS&I')
Incremental new business long-term cash generation of £12 million from our
CS&I business is down on the prior year (HY 2021: £18 million) primarily
due to increased expenses reflecting increased investment in our proposition.
However, we have been developing innovative retirement income solutions during
the year, to support growth in this business over time.
Europe
There is a small decrease in the incremental new business long-term cash
generation from our European business at £13 million (HY 2021: £16m), due to
lower margins arising from changing sales and investment mix in the
International bond market.
SunLife
Our incremental new business long-term cash generation from SunLife of £11
million has decreased year-on-year (HY 2021: £22 million), reflecting the
impact of the cost of living crisis on our SunLife customer base leading to
lower sales.
Group AUA
Group AUA as at 30 June 2022 was £268.8 billion (FY 2021: £310.4 billion).
The decrease in the period is largely driven by £38.5bn of adverse market
movements, but importantly there is limited impact from these market movements
on the fees we earn, as they are hedged, which results in predictable cash
generation.
Heritage net flows
UK Heritage net outflows in the period of £4.9 billion (HY 2021: £5.8
billion net outflows) reflect policyholder outflows on claims such as
maturities and surrenders, net of total premiums received in the period from
in-force contracts.
Open net flows
Open net inflows in the period of £1.8 billion compares to net outflows of
£1.1 billion across HY 2021. This reflects a good first half performance in
BPA and the strong turnaround in our capital-light fee-based business.
Retirement Solutions net flows
Net inflows in Retirement Solutions, which encompasses our individual annuity
and BPA businesses, were £0.4 billion in the period (HY 2021: £0.6 billion
net outflow). Gross inflows during the period were £1.9 billion (HY 2021:
£0.8 billion), inclusive of £1.6 billion of new BPA premiums written over
the first six months. Outflows of £1.5 billion in the period (HY 2021 £1.4
billion) primarily reflect the natural run-off of our in-payment annuity
policies.
Workplace net flows
Net inflows within our fee-based Workplace business were £1.7 billion in the
period (HY 2021: £0.2 billion net outflow), a significant improvement
year-on-year with the investment we have made into our proposition and our
Standard Life brand, enabling us to both retain our existing schemes and win
new schemes in the market. The momentum in our new scheme wins continues to
accelerate, with 42 new schemes won in the first half of 2022 compared to 16
schemes won in HY 2021, although the transfer of assets for new scheme wins
typically have up to a 12 month time lag, and so these will be seen in 2023.
Gross inflows were £3.2 billion, a 28% increase on HY 2021 (£2.5 billion),
partly reflecting increased flows due to annual salary increases. The outflows
experience year to date of £1.5 billion is much improved on HY 2021 (£2.7
billion) which were impacted by historic scheme losses delayed partly due to
the pandemic and decisions taken on our legacy proposition that has since been
improved substantially.
Other fee-based business net flows
We have seen net outflows of £0.3 billion (HY 2021: £0.3 billion net
outflows) from our other fee-based businesses. Gross inflows in the period
were £2.2 billion (HY 2021: £2.3 billion), primarily reflecting our
individual retirement products sold in the UK and Europe, while outflows of
£2.5 billion over the period (HY 2021: £2.6 billion) are largely due to the
natural run-off of our CS&I and Europe businesses.
Other movements including markets
AUA decreased by £38.5 billion (HY 2021: £4.5 billion increase) as a result
of other movements, driven by the net adverse impacts of market movements,
largely due to rising yields.
CTIP reclassification
The Group offers a Corporate Trustee Investment Plan ('CTIP') product which
remains open for new business and therefore the £10.1 billon of AUA for this
product has been moved from the Heritage division (which manages products
closed to new business) to the Open division (which manages our products that
are open to new business).
IFRS results
IFRS profit/(loss) is a GAAP measure of financial performance and is reported
in our statutory financial statements on page 29 of the 2022 Interim Financial
Report.
Operating profit is a non-GAAP financial performance measure based on expected
long-term investment returns. It is stated before amortisation and impairment
of intangibles, other non-operating items, finance costs and tax.
Please see the APM section on page 69 of the 2022 Interim Financial Report for
further details of this measure.
IFRS profit and loss statement
£m 30 June 30 June
2022
2021
Heritage 280 375
Open 287 178
Service company (26) 2
Group costs (34) (28)
Operating profit before tax 507 527
Investment return variances and economic assumption changes (1,076) (824)
Amortisation and impairment of intangibles (258) (299)
Other non-operating items (280) 28
Finance costs (103) (111)
Profit before tax attributable to non-controlling interest 31 51
Loss before tax attributable to owners (1,179) (628)
Tax credit/(charge) attributable to owners 303 (39)
Loss after tax attributable to owners (876) (667)
IFRS loss after tax
The Group generated an IFRS loss after tax attributable to owners of £876
million (HY 2021: loss of £667 million), which primarily reflects £1,076
million of adverse investment return variances along with several other
movements shown in the table above and explained below.
Operating profit
The Group generated a slightly reduced operating profit of £507 million (HY
2021: £527 million), reflecting a decrease in profits emerging from the
Heritage business and additional costs incurred in the service companies as a
result of investment in the Open division and the development of our Asset
Management capabilities. These amounts have been partly offset by increased
profits in the Open business, largely as a result of increased BPA new
business.
Basis of operating profit
Operating profit generated by our Heritage and Open business segments 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
prudent margins and the interest cost of unwinding the discount on the
liabilities).
The principal assumptions underlying the calculation of the long-term
investment return are set out in Note 4.1 to the IFRS condensed consolidated
interim financial statements.
Operating profit includes the effect of variances in experience for
non-economic items, such as mortality and persistency, and the effect of
changes in non-economic assumptions. Any impact from market movements is shown
outside of operating profit. Operating profit is net of policyholder finance
charges and policyholder tax.
Heritage operating profit
Our Heritage business segment does not actively sell new life or pension
policies and runs-off gradually over time. Our Heritage segment delivered
operating profit of £280 million in the period (HY 2021: £375 million). The
year-on-year decrease reflects a decrease in expected return on with-profits
business due to reduced bonuses, adverse experience variances and a
strengthening in assumption changes for late retirement assumptions, together
with the positive impact of modelling enhancements recognised in the prior
period.
Open operating profit
The Group's Open business segment delivered an operating profit of £287
million (HY 2021: £178 million). This includes operating profits generated in
the Group's Retirement Solutions, Workplace and CS&I business units, as
well as new business distributed through the Group's SunLife brand and our
European operations. The operating profit generated in the period includes
stronger Retirement Solutions new business profits of £77 million (HY 2021:
£35 million) due to the increased level of BPA business written in 2022 and
positive assumption and methodology changes.
Service company
The operating loss for management services from the service company of £26
million (HY 2021: profit of £2 million) comprises income from the life and
holding companies in accordance with the respective management services
agreements less fees related to the outsourcing of services and other
operating costs. The decrease compared to the prior period reflects additional
costs incurred, driven by investment in the Open division and the development
of asset management capabilities in support of our growth strategy. This
partly reflects that these costs have not yet been factored into the
management service agreements for recharging back to the life companies.
Group costs
Group costs in the period were £34 million (HY 2021: £28 million). They
mainly comprise project recharges from the service companies and the returns
on the scheme surpluses/deficits of the Group staff pension schemes. The
increase in costs compared to the prior period principally reflects the
inclusion of costs associated with developing our Group capabilities to
support our growth ambitions.
Investment return variances and economic assumption changes
The net adverse investment return variances of £1,076 million (HY 2021: £824
million negative) have primarily arisen as a result of rising yields and
inflation, a widening of credit spreads, offset by a fall in global equity
markets. Movements in yields, inflation and equity markets are hedged to
protect our Solvency II surplus from volatility, but our IFRS balance sheet
is, in effect, "over-hedged" as it does not recognise the additional Solvency
II balance sheet items such as certain future profits and the Solvency Capital
Requirements. Therefore, the impact of the adverse hedging instrument values,
which offset the positive market movements in the period, gives rise to losses
in the IFRS results, and vice-versa. However, importantly the Group's cash
generation and dividend capacity are unaffected by this due to the Group's
continued resilient Solvency balance sheet.
Amortisation and impairment of acquired in-force business and other intangibles
The previously acquired in-force business is being amortised in line with the
expected run-off profile of the profits to which it relates. The amortisation
and impairment of acquired in-force business during the period of £248
million (HY 2021: £288 million) has decreased year-on-year reflecting the
impact of the run-off. Amortisation and impairment of other intangible assets
totalled £10 million in the period (HY 2021: £11 million).
Other non-operating items
Other non-operating items in the period totalled a £280 million loss (HY
2021: £28 million positive impact, inclusive of a £110 million gain on the
Standard Life brand acquisition). Items in H1 2022 include £113 million of
one-off costs related to the increase in expected costs following the
strategic decision to re-phase our Standard Life customer & IT migration
programme. As explained at our Full Year 2021 results, we have re-phased the
integration programme to build out our Open business capabilities on the TCS
Diligenta ('TCS') platform to enhance our competitive advantage, with the
migration of our legacy policies onto the TCS platform now expected to
complete by 2025. A key milestone for the project was achieved in the first
half of 2022, with the full migration of 400,000 Standard Life annuities to
TCS.
Also included are £47 million of costs associated with the implementation of
IFRS 17, £20 million of costs associated with the ongoing ReAssure
integration programme, £10 million of costs associated with a strategic
initiative to enhance capabilities in relation to regulatory approvals which
will support the move towards the Group's strategic asset allocation alongside
growth delivered through BPA transactions, £61 million of other corporate
project costs and other net one-off items totalling a cost of £29 million.
Finance costs
Finance costs of £103 million (HY 2021: £111 million) reflect interest borne
on the Group debt instruments.
Tax charge attributable to owners
The Group's approach to the management of its tax affairs is set out in its
Tax Strategy document which is available in the corporate responsibility
section of the Group's website. The Group tax credit for the period
attributable to owners is £303 million (HY 2021: £39 million tax charge)
based on a loss (after policyholder tax) of £1, 179 million (HY 2021: loss of
£628 million). A reconciliation of the tax charge is set out in Note 5 to the
IFRS condensed consolidated interim financial statements.
Financial leverage
The Group seeks to manage the level of debt on its balance sheet by monitoring
its financial leverage ratio. The financial leverage ratio as at 30 June 2022
is 27%(1) (31 December 2021: 28%), having reduced following active
de-leveraging with the repayment of a £450 million debt maturity. The ratio
remains within the target range of 25% to 30% that management considers to be
associated with maintaining an investment grade rating.
1 Leverage ratio is pro forma for a £450m debt repayment made in July
and allowing for currency hedges over foreign currency denominated debt.
Dividend
2022 Interim dividend
2021 was a pivotal year for Phoenix as we implemented our first ever organic
dividend increase of 3%. This reflected the strong organic performance from
our Open business in 2021. As ever, our 2022 Interim dividend of 24.8 pence
per share is equal to the 2021 Final dividend, which is therefore a 3%
year-on-year increase compared to the 2021 Interim dividend.
2022 dividend outlook
Looking to the remainder of 2022, I am really excited that we have the
opportunity to demonstrate the strength of our business model, by potentially
delivering both organic and inorganic dividend growth for the year.
The significant value and incremental cash flow that we expect to generate
through the acquisition of Sun Life of Canada UK has enabled the Board to
propose a 2.5% inorganic increase in the Group's dividend, to take effect from
and including the 2022 Final Dividend, subject to completion.
In addition, the Board will assess ahead of the Full Year results whether
organic business growth delivered during the year can sustainably fund an
organic dividend increase for 2022 as well.
Dividend policy and future communication approach
Our updated dividend policy is to "pay a dividend that is sustainable and
grows over time" and we are well positioned to deliver on this policy in 2022
and beyond.
However, in future years, given the Board's confidence that we can now deliver
both organic and inorganic growth, on an ongoing basis, we intend to simplify
our dividend communications. We will do this by announcing any potential
annual dividend increase at our Full Year results, which combines both organic
and inorganic growth, rather than providing separate dividend guidance on
announcement of future M&A.
Outlook
Looking ahead
We delivered strong financial results in the first half of 2022, across our
financial framework of cash, resilience and growth, and announced our first
cash funded acquisition, of Sun Life of Canada UK.
We are also on track to deliver all of our financial targets for 2022.
This includes delivering at the top-end of our 2022 cash generation target
range of £1.3 to £1.4 billion, and maintaining our resilient balance sheet
by operating within our target ranges for our Solvency Shareholder Capital
Coverage Ratio (140-180%) and leverage ratio (25-30%).
In terms of growth, having delivered £430 million of incremental new business
long-term cash generation in the first half and with a strong second half
pipeline for BPA, I am confident of once again more than offsetting the
Heritage run-off through organic growth from our Open business. I therefore
expect us to deliver organic growth that achieves incremental new business
long-term cash generation of in excess of £800 million for 2022.
We remain focused on optimising every pound of shareholder capital through a
rigorous capital allocation framework that ensures we only invest in growth
opportunities that drive real value. With our shareholder capital coverage
ratio currently at 186%, we have surplus capital available to invest into both
organic and inorganic growth opportunities.
As a result, we are confident of fully investing our target capital allocation
of around £300 million into BPA for 2022, and have the capacity to cash fund
the £248 million acquisition of Sun Life of Canada UK, which we aim to
complete in Q1 2023, subject to regulatory approval.
Whilst recognising the challenging global economic environment we are all
currently navigating, we are confident that the Group is well-positioned to
continue delivering on our strategy. Our comprehensive approach of hedging
equity, interest rates, currency and inflation risk, combined with our prudent
management of credit risk, protects both our Solvency II surplus, and our
Group long-term free cash, from market volatility. This underpins our
resilient cash generation which means we can confidently continue to invest
into organic and inorganic growth, and pay our sustainable dividend over the
very long term.
I look forward to continuing to deliver on our purpose and strategy in the
second half and beyond, which in turn will support us in delivering against
our financial framework of cash, resilience and growth.
Rakesh Thakrar
Group Chief Financial Officer
Principal risks and uncertainties facing the Group
The Group's principal risks and uncertainties are detailed in this section,
together with their potential impact, mitigating actions in place and any
change in risk exposure since the Group's 2021 Annual Report and Accounts,
published in March 2022.
A principal risk is a risk or combination of risks that can seriously affect
the performance, future prospects or reputation of the Group, including risks
that would threaten its business model, future performance, solvency or
liquidity. The Board Risk Committee has carried out a robust assessment of
principal risks for the Interim Report; as a result of this review the 13
risks noted in the Group's 2021 Annual Report and Accounts have been retained
and assessed as 'No Change' in overall risk exposure.
Risk Environment
The external risk environment remains uncertain, as noted in the 2021 Annual
Report Accounts; it is driven by a combination of factors which may have
implications for the Group, its customers and colleagues. These include:
· The global macro-economic environment is highly uncertain and volatile as
a result of the potential implications from rising inflation and interest
rates, post-COVID-19 after effects, global Central Bank policy, geopolitical
risk and the potential for global economic slow-down.
· The cost of living crisis and rising inflation will impact the lives of
the Group's customers, particularly those most vulnerable, and colleagues.
Throughout the COVID-19 pandemic the Group provided ongoing support to
customers and colleagues and work is underway to ensure the same level of
support is provided as the impacts of the cost of living crisis begin to
materialise.
· Geopolitical risk remains prominent, including the effects arising from
the conflict in Ukraine as well as post-Brexit factors, an upcoming change of
UK Prime Minister and a renewed Scottish National Party campaign for Scottish
Independence. The Group continues to monitor developments across the political
environment.
· The regulatory change agenda continues to have potentially significant
implications for the Group. The Group continues to engage with the Treasury
and PRA on the proposed Solvency II Reforms and implementing the FCA's new
Consumer Duty effectively is a key areas of focus for the Group.
Whilst the risk environment remains challenging and uncertain it is essential
that the Group appropriately understands its risk exposures and how these
change in stressed circumstances. This is enabled through application of the
Group's Risk Management Framework (RMF) and its rigorous Stress and Scenario
Testing (SST) Programme; over 2022 the SST Programme tested the Group's
resilience to both financial and non-financial stressed events and this
continues to be monitored by the Board Risk Committee.
Strategic priorities:
1. Optimise our in-force business
2. Enhance our operating model and culture
3. Grow our business to support both new and existing customers
4. Innovate to provide our customers with better financial futures
5. Invest in a sustainable future
Risk Impact Mitigation Strategic priorities Change from 2021 Annual Report and Accounts
Strategic risk
The Group fails to make further value adding acquisitions or effectively The Group is exposed to the risk of failing to drive value through inorganic The Group continues to assess and execute new inorganic growth opportunities 1 No change.
transition acquired businesses growth opportunities, including acquisitions of life and pensions books of and applies a clear set of criteria to assessing these opportunities.
business.
2 The integration of ReAssure plc is continuing as planned, with the integration
The Group's acquisition strategy is supported by the Group's financial
of key functions, such as Finance and Actuarial, progressing well.
The transition of acquired businesses into the Group, including customer strength and flexibility, strong regulatory relationships and its track 3
migrations, could introduce structural or operational challenges that result record of generating value and delivering good customer outcomes that are in
In early 2022 the Group made the strategic decision to re-phase the remaining
in the Group failing to deliver the expected outcomes for customers or value line with expectations. Standard Life customer policy migrations to complete by 2025. Progress towards
for shareholders.
this revised target has been made with the successful migration of around
The financial and operational risks of target businesses are assessed in the 400,000 Standard Life customer policies to the TCS BaNCS platform which
acquisition phase and potential mitigants are identified. completed in May 2022. Further customer migrations are planned through to
2025, which will support delivery of the Group's strategic objectives.
Integration plans are developed and resourced with appropriately skilled staff
to ensure target operating models are delivered in line with expectations. On 4 August 2022, the Group announced the acquisition of Sun Life of Canada
UK, a closed book UK life insurance company, from Sun Life Assurance Company
Customer migrations are planned thoroughly with robust execution controls in of Canada, for cash consideration £248 million. This equates to an attractive
place. Lessons learned from previous migrations are applied to future activity price to shareholder Own Funds ratio of 83%, in line with the Board's
to continuously strengthen the Group's processes. disciplined approach to the deployment of shareholder capital. The acquisition
is subject to regulatory approvals and is expected to complete during Q1 2023.
Sun Life of Canada UK operates a predominantly outsourced business model with
the majority of its policy administration already undertaken by our strategic
outsourcing partner (TCS Diligenta), which supports a simplified operational
integration programme.
The Sun Life of Canada UK acquisition is expected to deliver approximately
£470 million of incremental long-term cash generation, with 30% expected to
emerge in the first three years.
The Group's strategic partnerships fail to deliver the expected benefits Strategic partnerships are a core enabler for delivery the Group's strategy; The Group has in place established engagement processes with abrdn plc 2 No change.
they allow it to meet the needs of its customers and clients and deliver value to oversee and develop the strategic partnership. These processes reflect the
for its shareholders. The Group's end state operating model will leverage the simplified and extended strategic partnership between the Group and abrdn plc 3 Whilst the Group has further strengthened and simplified its strategic
strengths of its strategic partners whilst retaining in-house key skills which that was announced in February 2021.
partnerships since the 2021 Annual Report and Accounts, 'No Change' continues
differentiate it from the market.
4 to be reflective of the Group's ongoing reliance on its strategic partners to
The Group's engagement with Diligenta, and its parent TCS, adheres to a
deliver the volume of change needed to deliver the Group's strategic
There is a risk that the Group's strategic partnerships do not deliver the rigorous governance structure, in line with the Group's Supplier Management objectives.
expected benefits. Some of the Group's key strategic partnerships include: Model. As a result, productive and consistent relationships have been
developed with TCS, which will continue to develop throughout future phases of The Group continues to develop its partnership with TCS to support its
abrdn plc: Provides investment management services to the Group including the the enlarged partnership. strategic deliverables. The successful migration of around 400,000 Standard
development of investment solutions for customers. abrdn plc manages c. £165
Life Assurance customer policies to the TCS BaNCS platform was completed in
billion of the Group's assets under administration, at January 2022. The Group has in place established processes to oversee services provided by May 2022. Planning for further migrations in 2022 and beyond is underway; this
HSBC. is in line with the Group's previously reported timescales.
TCS: The Group's enlarged partnership with TCS is expected to support growth
plans for the Open business, enabling further market-leading digital and During the first half of 2022, the Group successfully migrated £60 billion of
technology capabilities to be developed to support enhanced customer outcomes. assets to be administered by HSBC. This is a key milestone in the Group's
journey towards implementing harmonised investment administration processes.
HSBC: Provides fund accounting services to the Group.
The simplified and extended partnership with abrdn plc continues to progress
towards the Target Operating Model.
The Group fails to deliver long-term growth in its Open business The Open business has strong foundations and is central to the Group's purpose The Group's Business Unit structure brings renewed focus and accountability. 2 No change.
of helping people secure a life of possibilities. It is also fundamental to The key areas of growth are Pensions & Savings and Retirement Solutions.
the Group's ambition of continuing to generate sufficient Open business growth
3 Over the first half of 2022 the Group completed BPA transactions with a
to offset the run-off from the in-force business, which in turn brings Each Business Unit holds an annual strategy setting exercise to consider
combined premium of £1.6 billion, which compares to the £0.4 billion
sustainability to organic cash generation. customer needs, the interests of shareholders, the competitive landscape and 4 completed in the first half of 2021. However, 'No Change' reflects that there
the Group's overall purpose and objectives.
is still uncertainty (driven by the risk environment) around the delivery of
Confidence in the Group might be diminished if the Open business fails to
consistent long-term growth in the Group's Open Business.
deliver against The Group's Annual Operating Plan commits to making significant investment in
its strategic objectives, particularly as the Group seeks to promote a its Open business which will include propositions that are driven by customer In Workplace, the Group continues to make progress in the market, launching
'customer obsessed' mind-set underpinned by strong retention and consolidation insight. new propositional features such as Workplace ISA. The Group continues to
as customers journey to and through retirement.
recruit to increase its capability in terms of proposition and distribution;
The Group is established in the Bulk Purchase Annuities (BPA) market and 42 new scheme wins have been confirmed between January and June 2022 (compared
continues to invest in its operating model to further strengthen its with 41 for the full year in 2021), and the Group is actively managing a
capability to support its growth plans. number of enquiries.
For new BPA business, the Group continues to be selective and proportionate,
focusing on value not volume, by applying its rigorous Capital Allocation
Framework.
The Group does not have sufficient capacity and capability to fully deliver The Group's ability to deliver change on time and within budget could be The Group's Change Management Framework was strengthened in 2021 with an 1 No change.
its significant change agenda which is required to execute the Group's adversely impacted by insufficient resource and capabilities as well as enhanced change model, consistent with ensuring empowerment and accountability
strategic objectives inefficient prioritisation, scheduling and oversight of projects. The risk within Business Units to effectively deliver change. Further improvements are 2 In 2022, the Group continues to manage a significant volume of change,
could materialise both within the Group and its strategic partners. being made during 2022, including strengthening the assessment of change
consistent with 2021.
prioritisation to ensure that there is clear alignment to the Group's 3
This could result in the benefits of change not being realised by the Group strategy.
Embedding the strengthened Change Management Framework (noted in the 2021
in the timeframe assumed in its business plans
4 Annual Report and Accounts) is ongoing, with continuous improvements taking
and may result in the Group being unable to deliver its Information setting out the current and forecast levels of resource demand and
place as new processes are embedded.
strategic objectives. supply continues to be provided to accountable senior management to enable 5
informed decision-making to take place. This aims to ensure that all material
risks to delivery are appropriately identified, assessed, managed, monitored
and reported.
The Group fails to appropriately prepare for and manage the effects The Group is exposed to market risks related to climate change as a result During 2021 the Group enhanced the approach to managing the financial risks of 1 No change.
of climate change and wider ESG risks of the potential implications of a transition to a low carbon economy. climate change, including embedding climate risk considerations within the
Group's RMF, to meet the requirements of the PRA Supervisory Statement 3/19 2 A number of positive initiatives are underway to deliver against the Group's
In addition, there are long-term market, insurance, reputational, (SS3/19). This resulted in enhanced disclosures, in line with the Task Force
Net-Zero targets and social purpose. However, 'No Change' is driven by the
propositional and operational implications of physical risks resulting from on climate-related Financial Disclosures ('TCFD') and details being outlined 3 Group's recognition that significant work, over a number of years, is required
climate change (e.g. the impact of physical risks on the prospects of in the Group's Climate Report. The report also includes planned future
to deliver on these commitments.
current and future investment holdings, along with potential impacts on future priorities across each of the TCFD focus areas. 4
actuarial assumptions).
The Group is committed to reducing carbon intensity for £250 billion of its
Consideration of material climate-related risks has been embedded into the 5 investment portfolio by at least 50% by 2030. In addition, an interim
The Group is also exposed to the risk of failing to respond to wider Group's risk policies. Over the first half of 2022, the Group has continued to de-carbonisation target of a 25% reduction in the carbon emission intensity of
Environmental, Social and Governance ('ESG') risks and delivering on its build its climate scenario modelling capabilities. £160 billion of its listed equity and credit investments by 2025 has been
social purpose; for example, failing to meet its sustainability commitments.
set. The Group has been working with its key partners and suppliers to
A failure to deliver could result in adverse customer outcomes, reduced The Group's sustainability strategy has continued to evolve to respond to encourage them to adopt Science Based Targets (SBTi) carbon reduction targets.
colleague engagement, reduced proposition attractiveness and reputational the changing needs of stakeholders, resulting in the Group setting targets
risks. to monitor progress towards its sustainability commitments. Further details The Group is developing forward-looking metrics factoring investee company
are available in the Sustainability Report. emission objectives and capturing management targets and strategy.
The Group continues to actively engage with regulators on progress with all The TCFD disclosures in the Group's Climate Report provide an overview of
climate change and sustainability-related deliverables. progress to date in achieving compliance with SS3/19 and planned future
priorities across each of the TCFD focus areas.
The Group has setup a think tank, 'Phoenix Insights', which aims to transform
the way society responds to the possibilities of longer lives. The Group's
ambition is to take the opportunities that people living longer presents to
the forefront of public debate and the political agenda.
CUSTOMER RISK
The Group fails to deliver good outcomes for its customers or fails to The Group is exposed to the risk that it fails to deliver good outcomes for The Group's Conduct Risk Appetite sets the boundaries within which the Group 2 No change.
deliver propositions that continue to meet the evolving needs of customers its customers, leading to adverse customer experience and potential customer expects customer outcomes to be managed.
harm. This could also lead to reputational damage for the Group and/or
3 In 2022, the Group has continued to make significant investments in its
financial losses. The Group Conduct Strategy, which overarches the Risk Universe and all risk
propositions; launching a Workplace ISA and successfully completing the switch
policies, is designed to detect where customers are at risk of poor outcomes, 4 of 87,000 Master Trust pension scheme members to its flagship workplace
In addition a failure to deliver propositions that meet the evolving needs of minimise conduct risks, and respond with timely and appropriate mitigating
default solution, the Sustainable Multi Asset Universal Strategic Lifestyle
customers may result in the Group's failure to deliver its purpose of helping actions. 5 Profile. This is the first phase of Standard Life's plans to establish
people secure a life
sustainable strategies as its Defined Contribution default solution for
of possibilities. The Group has a suite of customer policies which set out key customer risks pension savers, with over £15 billion in total earmarked to be migrated
and minimum control standards in place to mitigate them. during 2022 on behalf of 1.5 million customers.
The Group maintains a strong and open relationship with the FCA and other Throughout the COVID-19 pandemic the Group provided ongoing support to
regulators, particularly on matters involving customer outcomes. customers, including those most vulnerable, both when paying out on their
protection plans and when making decisions about their life savings during
The Group's Proposition Development Process ensures consideration of customer this period of uncertainty. Work is underway to ensure the same level of
needs and conduct risk when developing propositions. support is provided to our customers, particularly those most vulnerable, as
the impacts of the cost of living crisis and rising inflation begin to
crystallise. For example, there is content on the Standard Life website with
information to support customers through the cost of living crisis and the
impacts of rising inflation.
The Group is speaking to the Government and the regulator about potential
legislative changes and the development of solutions and propositions to close
the Guidance Gap in the market. A key aim of this is to deliver better
customer outcomes and support customers in better preparing for their
retirement.
OPERATIONAL RISK
The Group or its outsourcers are not sufficiently operationally resilient The Group is exposed to the risk of causing intolerable levels of disruption The Group has established an Operational Resilience Framework that identifies 1 No change.
to its customers and stakeholders if it cannot maintain the provision of important business services, accountability, sets tolerances for disruption
important business services when faced with a major operational disruption to and describes the processes that will deliver the required level of 2 Whilst uncertainty regarding further COVID-19 related implications for the
core IT systems and operations. This could occur either in-house or within the resilience. This enhances the protection of customers and stakeholders,
Group's operational resilience has reduced at present, the Group has a
Group's primary and downstream outsourcers and includes a range of preventing intolerable harm and supports compliance with the regulations. The 3 significant change and customer migration agenda, effective delivery of which
environmental and Group works closely with its outsourcers to ensure that the level of is required to deliver planned strengthening of the Group's operational
climatic factors. resilience delivered is aligned to the Group's impact tolerances. resilience both internally and with some Outsourced Service Providers.
The Group regularly conducts customer migrations as part of transition The Group and its outsourcers have well established business continuity The Group has a programme of work to take forward areas of identified
activities in delivering against its strategic objectives. The fundamental management and disaster recovery frameworks that are subject to an annual strengthening ahead of the next key regulatory deadline of the end of March
risk faced when executing migrations is an interruption to the safe, stable refresh and regular testing. 2025.
and secure customer services delivered by the Group. Any service interruption
may result in the Group failing to deliver expected customer outcomes. The Group continues to actively manage operational capacity and monitor As noted in the Group's 2021 Annual Report and Accounts, whilst many potential
service continuity required to deliver its strategy, including transition exposures to COVID-19 can now be effectively mitigated, a large-scale loss of
Regulatory requirements in respect of operational resilience were published in activities. Rigorous planning and stress testing is in place to identify and colleagues due to illness or incapacity, in the UK or globally, is more
March 2021, together with a timetable to achieve full compliance. develop pre-emptive management strategies should services be impacted as a challenging to resolve in the short-term as there remains uncertainty around
Whilst the specific requirement to work within set impact tolerances takes result of customer migrations. the efficacy of vaccines against future COVID-19 variants.
effect in March 2025, the Group is already exposed to regulatory censure in
the event of operational disruption where the regulator determines that the The Group and its outsourcers implemented a hybrid working model The Group aims to deliver considerable customer transformation activity in
cause was, fully or in part, a breach of existing regulation. significantly reducing exposure to a number 2022, consistent with the quantum of change in 2021. Although the scale of
of physical risks caused by COVID-19. change exposes the Group to significant risk, this is mitigated through
strengthened Resilience and Change Management Frameworks.
The Group has taken action through previous strategic transformation activity
to reduce exposure to technological redundancy and key person dependency risk,
increasing resilience of our customer service.
The Group is impacted by significant changes in the regulatory, legislative or Changes in regulation could lead to non-compliance with new requirements The Group undertakes proactive horizon scanning to understand potential 1 No change.
political environment that could impact the Group's fair treatment of its customers. These could changes to the regulatory and legislative landscape. This allows the Group to
require changes to working practices and have an adverse impact on resources understand the potential impact of these changes to amend working practices to 2 This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
and financial performance. meet the new requirements by the deadline.
Accounts due to the uncertainty around Solvency II Reforms; there is 'No
3 change' from that assessment.
Political uncertainty or changes in the government could see changes in
policy that could impact the industry in which In April 2022, HM Treasury and the PRA issued a consultation on proposed
the Group operates. Solvency II reforms which included a 60-70% reduction to the Risk Margin and
reform of the Fundamental Spread and eligibility requirements for assets in
Matching Adjustment portfolios. Changes to the Solvency Capital Requirement
are omitted from this phase of the reform. The Group supports the PRA and HM
Treasury's objectives to reform the regulations to better suit the UK market
whilst maintaining the right safeguards for policyholders. However,
uncertainty remains over when the reforms will be implemented and the
quantitative impacts will depend on the exact detail of the final legislation.
The Group is actively involved in industry lobbying on Solvency II reforms and
it responded to the consultation in July 2022. A further technical
consultation is expected later in 2022, which the Group will continue to
engage proactively with.
The objectives of the FCA's proposed new Consumer Duty are to deliver a higher
and more consistent level of consumer protection and for the industry to do
more to foresee and prevent harm before it happens. On 27 July 2022 the FCA
published final rules and guidance; the implementation date has been extended
and phased from April 2023. The Group is currently assessing the impacts of
the final rules and guidance through its internal project which is underway to
support this work and will continue to engage with the wider industry and ABI
on the proposed changes.
The Group or its Supply Chain are not sufficiently cyber resilient As the Group continues to grow in size and profile this could lead to The Group is continually strengthening its cyber security controls, attack 1 No change.
increased interest from cyber criminals and a greater risk of cyber-attack detection and response processes, identifying weaknesses through ongoing
which could have significant impact on customer outcomes, strategic assessment and review. 2 This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
objectives, regulatory obligations and the Group's reputation and brand.
Accounts due to the conflict in Ukraine. This remains the key driver for the
The Information/Cyber Security Strategy includes a continuous Information 'No Change' assessment in the Interim Report. The ongoing conflict in Ukraine
Based on external events and trends, the threat posed by a cyber security Security and Cyber Improvement Programme, which is driven by input from the has resulted in increased cyber threat levels and the increased likelihood of
breach remains high and the complexity of the Group's increasingly Annual Cyber Risk Assessment and external threat intelligence sources. a cyber-attack from a State actor; this would most likely be against the UK's
interconnected digital ecosystem exposes it to multiple attack vectors. These
Critical National Infrastructure, particularly on supply chains and the wider
include phishing and business email compromise, hacking, data breach and The Group continues to consolidate its cyber security tools and capabilities. Financial Services industry which the Group relies upon. The Group regularly
supply chain compromise. The specialist Line 2 Information Security & Cyber Risk team provides monitors National Cyber Security Centre guidance and other threat intelligence
independent oversight and challenge of information security controls; sources. To date, the Group has not seen a material increase in cyber-attacks
Increased use of online functionality to meet customer preferences and hybrid identifying trends, internal and external threats and advising on appropriate since the conflict started.
ways of working, including remote access to business systems, mitigation solutions.
adds additional challenges to cyber resilience and could impact service
The Group's cyber controls are designed and maintained to repel the full range
provision and customer security. Comprehensive outsourced service provider and third party oversight and of the cyber-attack scenarios; although the Group's main threat is considered
assurance processes are in place. Regular Board, Executive, Risk and Audit to be Cyber Crime, from Individuals or Organised Crime Groups, the same
Committee engagement occurs within the Group. controls are utilised to defend against a Nation-State level cyber-attack.
In the first half of 2022 the Group continued to strengthen and consolidate
its cyber controls, including in areas such as Vulnerability and Patch
Management, Detect and Respond and infrastructure scanning capabilities.
Following a Final Stage Assessment in late June 2022, the British Standards
Institution (BSI) recommended Phoenix Group for ISO 27001 Information Security
Management Certification for its Workplace Pension and Benefits schemes.
The Group fails to retain or attract a diverse and engaged workforce with Delivery of the Group's strategy is dependent on a talented, diverse and Timely communications to colleagues aim to provide clarity around corporate 1 No change.
the skills needed to deliver its strategy engaged workforce. activities, including details of key milestones to deliver against the
Group's plans. 2 Whilst there have been strong engagement scores in colleague surveys during
Periods of prolonged uncertainty can result in a loss of critical corporate
2021 and 2022, 'No Change' is driven by uncertainty regarding the longer term
knowledge, unplanned departures of key individuals or the failure to attract The Group regularly benchmarks terms and conditions against the market and 3 social and marketplace impacts of the pandemic and cost of living crisis on
individuals with the appropriate skills to help deliver the Group's strategy. maintains succession plans for key individuals, ensuring successors bring
colleague attrition and sickness. Skills essential to the Group continue to be
appropriate diversity of thought, background and experience. Every six months, 4 in high-demand in the wider marketplace and recruitment and retention still
This risk is inherent in the Group's business model given the nature of the Group's CEO and HR Director meet with the Executive Committee to discuss
has the potential to be impacted by post-Brexit, COVID-19 and inflationary
acquisition activity and specialist skillsets. talent, succession and diversity. 5 factors. The Group monitors this closely but continues to remain confident in
the attractiveness of its colleague proposition.
Potential areas of uncertainty include: the ongoing transition of ReAssure Monthly colleague surveys help to promote continuous listening and rapid
businesses into the Group, the expanded strategic partnership with TCS and the identification of concerns and actions. The Group is exploring ways to enhance the use of apprenticeships to fill key
introduction of the hybrid working model.
skills, and creating bespoke graduate and early careers programmes for
The Group continues to actively manage operational capacity required to specialist technical areas.
deliver its strategy with ongoing focus on senior bandwidth, attrition and
sickness. The Group continues to successfully operate a hybrid working model, with
strategic investments in technology and other resources maximising its
Hybrid working offers colleagues greater flexibility in their working effectiveness. The model focuses on empowerment by enabling leaders and
practices. colleagues to agree working arrangements that meet individual, team and
business needs.
The Group looks to proactively respond to external social and marketplace
events that impact colleagues. The increased scale and presence of the Group, and success in multi-site and
remote working, gives greater access to a larger talent pool to attract in the
future. In addition, the Group's Graduate Programmes helps to support the
talent pipeline.
MARKET RISK
Adverse market movements can impact the Group's ability to meet its cash flow The Group and its customers are exposed to the implications of adverse market The Group undertakes regular monitoring activities in relation to market risk 1 No change.
targets, along with the potential to negatively impact customer sentiment movements. This can impact the Group's capital, solvency, profitability and exposure, including limits in each asset class, cash flow forecasting and
liquidity position, fees earned on assets held, the certainty and timing of stress and scenario testing. In particular, the Group's increase in exposure 2 The global macro-economic environment remains highly uncertain.
future cash flows and long-term investment performance for shareholders and to residential property and private investments, as a result of its BPA
customers. investment strategy, is actively monitored. 3 The Ukraine conflict and rapid increase in inflation have increased market
volatility over the first half of 2022, with potential for stagflation across
There are a number of drivers for market movements including government and The Group continues to implement de-risking strategies to mitigate unwanted developed economies. The longer-term impacts of the conflict are unknown,
central bank policies, geopolitical events, market sentiment, sector specific customer and shareholder outcomes from certain market movements, such particularly on the cost and availability of commodities and food, which could
sentiment, global pandemics and financial risks of climate change, including as equities, interest rates, inflation and foreign currencies. continue to hamper the post-COVID-19 recovery.
risks from the transition to a low carbon economy.
The Group maintains cash buffers in its holding companies and has access to a Inflation is considered a short to medium-term risk. Pressures are becoming
credit facility to reduce reliance on emerging cash flows. more constant and the UK Consumer Price Index is expected to rise to just over
13% in late 2022 and remain at elevated levels throughout much of 2023 as
The Group's excess capital position continues to be closely monitored and highlighted in the Bank of England's August Monetary Policy. Further Bank of
managed. The Group regularly discusses market outlook with its England rate increases could occur as a result.
asset managers.
As noted in the 'Customer' risk above, work is underway across the Group to
ensure customers are supported as the impacts of the cost of living crisis and
rising inflation begin to crystallise.
The Group continues to monitor, and actively manage, its market risk
exposures, including to interest rates and inflation, and to markets affected
by the conflict in Ukraine. The Group's strategy continues to involve hedging
the major market risks and in 2022 the Group's Stress and Scenario Testing
Programme continued to demonstrate the resilience of its balance sheet to
market stresses. Contingency actions remain available to help manage the
Group's capital and liquidity position if any unanticipated market movements
occur.
INSURANCE RISK
The Group may be exposed to adverse demographic experience which is out of The Group has guaranteed liabilities, annuities and other policies that are The Group undertakes regular reviews of experience and annuitant survival 1 No change.
line with expectations sensitive to future longevity, persistency and mortality rates. For example, checks to identify any trends or variances in assumptions.
if annuity policyholders live for longer than expected, then the Group will
3 There is 'No change' to this principal risk exposure since the 2021 Annual
need to pay their benefits for longer. The Group regularly reviews assumptions to reflect the continued trend of Report and Accounts given the ongoing uncertainty around future demographic
reductions in future mortality improvements. experience as a result of COVID-19 impacts, in addition to implications
The amount of additional capital required to meet additional liabilities could
arising from cost of living crisis.
have a material adverse impact on the Group's ability to meet its cash flow The Group continues to manage its longevity risk exposures, which includes the
targets. use of longevity swaps and reinsurance contracts to maintain this risk within Demographic experience and the latest views on future trends continue to be
appetite. considered in regular assumption reviews although, for most products,
experience over the COVID-19 pandemic has still been given little weight given
The Group actively monitors persistency risk metrics and exposures against its anomalous nature.
appetite across the Open and Heritage businesses.
The Group is actively monitoring customer behaviour as a result of the cost of
Where required, the Group continues to take capital management actions to living crisis; this includes the impact that any change in behaviour could
mitigate adverse demographic experience. have on demographic assumptions. As noted elsewhere in this section, work is
underway to ensure support is provided to customers as the impacts from the
cost of living crisis begin to materialise.
The Group has completed BPA transactions with a combined premium of £1.6
billion in the first half of 2022. Consistent with previous transactions, the
Group continues to reinsure the vast majority of the longevity risk with
existing arrangements that are reviewed regularly.
CREDIT RISK
The Group is exposed to the risk of downgrade or failure of a significant The Group is exposed to the risk of downgrades and deterioration in the The Group regularly monitors its counterparty exposures and has specific 1 No change
counterparty creditworthiness or default of investment, reinsurance, derivatives or banking limits in place relating to individual counterparties, sector concentration
counterparties. and geographies. 2 In the first half of 2022 the Group has continued to undertake de-risking
This could cause immediate financial loss, or a reduction in future profits.
action to increase the overall credit quality of its portfolio and mitigate
The Group undertakes regular stress and scenario testing of the credit the impact of future downgrades on risk capital. Furthermore, the Group has
The Group is also exposed to trading counterparties, such as reinsurers or portfolio. Where possible, exposures are diversified using a range of refined its counterparty concentration limits framework to better manage
service providers failing to meet all or part of their obligations. This would counterparty providers. All material reinsurance and derivative positions are counterparty failure risk. This positive progress, and the easing of the
negatively impact the Group's operations which may in turn have adverse appropriately collateralised. economic and social impacts arising from COVID-19, is balanced by residual
effects on customer relationships and may lead to financial loss.
risks arising from the developing conflict in Ukraine. Uncertainties over the
The Group regularly discusses market outlook with its asset managers in global economic outlook and high inflation present an increased risk of
addition to the Line 2 Risk oversight provided. downgrades and defaults.
For mitigation of risks associated with stock-lending, additional protection The Group has no direct shareholder credit exposure to Russia or Ukraine and
is provided through indemnity insurance. no exposure to sanctioned entities.
As a result of BPA transactions, the Group continues to increase investment in
illiquid credit assets. This is within appetite and the growth is in line with
the Group's strategic asset allocation plans and overall increase in the size
of the Group's credit portfolio.
Emerging risks and opportunities
The Group's senior management and Board take emerging risks and opportunities
into account when considering potential outcomes. This determines if
appropriate management actions are in place to manage the risk or take
advantage of the opportunity. Key risks discussed by senior management and the
Board during the first half of 2022 include:
Risk Title Description Risk Universe Category
Artificial Intelligence Risk in late adoption of operational efficiency opportunities that AI Operational
capabilities could present,
e.g. by not keeping up with emerging machine learning and perception systems.
Pension Superfunds Pension Superfunds could offer a cheaper or easier option than Bulk Purchase Strategic
Annuities (BPAs)
for Defined Benefit schemes looking to de-risk and transfer their liabilities.
Ukraine Conflict Short-term impacts are already being observed. Longer-term implications could Strategic
include: geopolitical power shifts, greater asset scrutiny, increased defence
spending, global food shortages and deceleration of climate change actions.
Multiple unknowns remain beyond the current humanitarian crisis.
Socio-Economic Inequality The cost of living crisis is increasing the gap between the 'haves' and the Customer & Insurance
'have nots'. October's further energy cap increase is set to exacerbate the
situation as those on lower incomes spend a greater proportion of income on
fuel/energy. House price to earnings ratio is also at the highest in
30 years (7x). There is potential for political instability with a view that
the Government is not doing enough to support those who are struggling
financially.
Pensions Innovation The savings gap, advice gap and need for an income in retirement are well Customer & Insurance
understood. Firms or products that can meet these needs will differentiate,
with ease of access and technology set to be the key enabler.
Statement of Directors' responsibilities
The Board of Directors of Phoenix Group Holdings plc hereby declares that, to
the best of its knowledge:
- the condensed consolidated interim financial statements for the half
year ended 30 June 2022, which have been prepared in accordance with UK
adopted IAS 34 Interim Financial Reporting, give a fair view of the assets,
liabilities, financial position and results of Phoenix Group Holdings plc and
its consolidated subsidiaries taken as whole;
- the Interim Report includes a fair view of the state of affairs of
Phoenix Group Holdings plc and its consolidated subsidiaries as at
30 June 2022 and for the financial half year to which the Interim Report
relates as required by DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules. This includes a description of the important events that occurred
during the first half of the year and refers to the principal risks and
uncertainties facing Phoenix Group Holdings plc and its consolidated
subsidiaries for the remaining six months of the year; and
- the Interim Report includes, as required by DTR 4.2.8R, a fair view of
the information required on material transactions with related parties and any
material changes in related party transactions described in the last Annual
Report.
By order of the Board
Andy Briggs Rakesh Thakrar
Group Chief Executive Officer Group Chief Financial Officer
12 August 2022
Phoenix Group Holdings plc Board of Directors
Chairman
Nicholas Lyons
Executive Directors
Andy Briggs
Rakesh Thakrar
Non-Executive Directors
Alastair Barbour
Stephanie Bruce
Karen Green
Hiroyuki Iioka
Wendy Mayall
Katie Murray
John Pollock
Belinda Richards
Margaret Semple
Nicholas Shott
Kory Sorenson
Auditor's opinion
Phoenix Group Holdings PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2022 which comprises the condensed consolidated income statement,
condensed statement of consolidated comprehensive income, condensed statement
of consolidated financial position, condensed statement of consolidated
changes in equity, condensed statement of consolidated cash flows and the
notes to the condensed consolidated interim financial statements. We have read
the other information contained in the half yearly financial report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial
statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with UK adopted international accounting standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
International Standard on Review Engagements 2410 (UK) "Review of Interim
Financial Information Performed by the Independent Auditor of the Entity"
issued by the Financial Reporting Council, however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the Directors
The Directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the Directors are responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
12 August 2022
Condensed consolidated income statement
For the half year ended 30 June 2022
Notes Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Gross premiums written 3,181 2,139 7,455
Less: premiums ceded to reinsurers (970) (526) (2,079)
Net premiums written 2,211 1,613 5,376
Fees and commissions 482 490 1,001
Total revenue, net of reinsurance payable 2,693 2,103 6,377
Net investment income (31,606) 8,105 18,001
Other operating income 16 38 76
Gain on completion of abrdn plc transaction 2.1 - 110 110
Loss on disposal of Ark Life 2.2 - - (23)
Net income (28,897) 10,356 24,541
Policyholder claims (4,667) (4,758) (9,656)
Less: reinsurance recoveries 822 833 1,597
Change in insurance contract liabilities 18,652 5,017 3,076
Change in reinsurers' share of insurance contract liabilities (1,000) (856) (177)
Transfer from unallocated surplus 177 79 106
Net policyholder claims and benefits incurred 13,984 315 (5,054)
Change in investment contract liabilities 14,070 (9,654) (16,812)
Amortisation and impairment of acquired in-force business (251) (292) (577)
Amortisation of other intangibles (10) (11) (20)
Impairment of goodwill - - (47)
Administrative expenses (1,122) (963) (2,056)
Net income under arrangements with reinsurers 281 48 22
Net expense/(income) attributable to unitholders 411 (130) (185)
Total operating expenses 27,363 (10,687) (24,729)
Loss before finance costs and tax (1,534) (331) (188)
Finance costs (116) (123) (242)
Loss for the period before tax (1,650) (454) (430)
Tax credit/(charge) attributable to policyholders' returns 5 471 (174) (258)
Loss before the tax attributable to owners (1,179) (628) (688)
Tax credit/(charge) 5 774 (213) (279)
Add: tax attributable to policyholders' returns 5 (471) 174 258
Tax credit/(charge) attributable to owners 5 303 (39) (21)
Loss for the period attributable to owners (876) (667) (709)
Attributable to:
Owners of the parent (907) (718) (837)
Non-controlling interests 10 31 51 128
(876) (667) (709)
Earnings per ordinary share
Basic (pence per share) 6 (92.0)p (73.3)p (86.4)p
Diluted (pence per share) 6 (92.0)p (73.3)p (86.4)p
Condensed statement of consolidated comprehensive income
For the half year ended 30 June 2022
Notes Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Loss for the period (876) (667) (709)
Other comprehensive income/(expense):
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value gains arising during the period 130 5 44
Reclassification adjustments for amounts recognised in profit or loss (158) (11) (36)
Exchange differences on translating foreign operations 15 (30) (45)
Foreign currency translation reserve recycled to profit or loss on - - 14
disposal of Ark Life
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability 648 90 281
Tax charge relating to other comprehensive income items 5 (155) (18) (138)
Total other comprehensive income for the period 480 36 120
Total comprehensive expense for the period (396) (631) (589)
Attributable to:
Owners of the parent (427) (682) (717)
Non-controlling interests 10 31 51 128
(396) (631) (589)
Condensed statement of consolidated financial position
As at 30 June 2022
Notes 30 June 2022 30 June 2021 31 December 2021
£m
£m
£m
Assets
Pension scheme asset 11 34 21 36
Reimbursement Rights 11 231 - 212
Intangible assets
Goodwill 10 57 10
Acquired in-force business 4,078 4,602 4,323
Other intangibles 221 241 232
4,309 4,900 4,565
Property, plant and equipment 126 131 130
Investment property 5,082 4,291 5,283
Financial assets
Loans and deposits 405 649 475
Derivatives 3,369 4,704 4,567
Equities 75,928 85,189 86,981
Investment in associate 422 444 431
Debt securities 87,974 102,283 104,761
Collective investment schemes 77,941 85,442 85,995
Reinsurers' share of investment contract liabilities 9,096 9,667 9,982
14 255,135 288,378 293,192
Insurance assets
Reinsurers' share of insurance contract liabilities 7,589 8,002 8,587
Reinsurance receivables 83 73 69
Insurance contract receivables 59 309 70
7,731 8,384 8,726
Deferred tax assets 30 - -
Current tax 456 451 419
Prepayments and accrued income 473 375 373
Other receivables 4,383 3,361 1,805
Cash and cash equivalents 10,738 9,112 9,112
Assets classified as held for sale 2 8,978 12,719 9,946
Total assets 297,706 332,123 333,799
Equity and liabilities
Equity attributable to owners of the parent
Share capital 8 100 100 100
Share premium 8 5 6
Shares held by employee benefit trust (13) (9) (12)
Foreign currency translation reserve 86 72 71
Merger relief reserve 1,819 1,819 1,819
Other reserves 9 28 42 56
Retained earnings 3,100 4,069 3,775
Total equity attributable to owners of the parent 5,128 6,098 5,815
Tier 1 Notes 494 494 494
Non-controlling interests 10 486 387 460
Total equity 6,108 6,979 6,769
Liabilities
Pension scheme liability 11 2,323 1,922 3,103
Insurance contract liabilities
Liabilities under insurance contracts 12 110,558 127,433 128,864
Unallocated surplus 1,591 1,781 1,801
112,149 129,214 130,665
Financial liabilities
Investment contracts 144,336 156,607 160,417
Borrowings 13 4,388 4,318 4,225
Deposits received from reinsurers 2,994 3,770 3,569
Derivatives 4,089 1,101 1,248
Net asset value attributable to unitholders 3,312 3,666 3,568
Obligations for repayment of collateral received 1,645 3,482 3,442
14 160,764 172,944 176,469
Provisions 261 243 235
Deferred tax liabilities 735 1,319 1,399
Reinsurance payables 276 130 143
Payables related to direct insurance contracts 1,953 1,858 1,864
Current tax 18 - 19
Lease liabilities 97 98 99
Accruals and deferred income 501 507 567
Other payables 2,032 2,543 721
Liabilities classified as held for sale 2 10,489 14,366 11,746
Total liabilities 291,598 325,144 327,030
Total equity and liabilities 297,706 332,123 333,799
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2022
Share capital (note 8) Share premium Shares held by employee benefit trust Foreign currency translation reserve Merger relief reserve Other reserves (note 9) Retained earnings Total Tier 1 Notes Non- Total equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
controlling interests (note 10)
£m
At 1 January 2022 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
(Loss)/profit for the period - - - - - - (907) (907) - 31 (876)
Other comprehensive income/(expense) for the period - - - 15 - (28) 493 480 - - 480
Total comprehensive income/(expense) for the period - - - 15 - (28) (414) (427) - 31 (396)
Issue of ordinary share capital, net of associated commissions and expenses - 2 - - - - - 2 - - 2
Dividends paid on ordinary shares - - - - - - (248) (248) - - (248)
Dividends paid to non-controlling interests - - - - - - - - - (5) (5)
Credit to equity for equity-settled share-based payments - - - - - - 8 8 - - 8
Shares distributed by the employee benefit trust - - 9 - - - (9) - - - -
Shares acquired by the employee benefit trust - - (10) - - - - (10) - - (10)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (12) (12) - - (12)
At 30 June 2022 100 8 (13) 86 1,819 28 3,100 5,128 494 486 6,108
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2021
Share capital (note 8) Share premium Shares held by the employee benefit trust Foreign currency translation reserve Merger relief reserve Other reserves (note 9) Retained earnings Total Tier 1 Notes Non-controlling interests (note 10) Total equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2021 100 4 (6) 102 1,819 48 4,970 7,037 494 341 7,872
(Loss)/profit for the period - - - - - - (718) (718) - 51 (667)
Other comprehensive (expense)/income for the period - - - (30) - (6) 72 36 - - 36
Total comprehensive (expense)/income for the period - - - (30) - (6) (646) (682) - 51 (631)
Issue of ordinary share capital, net of associated commissions and expenses - 1 - - - - - 1 - - 1
Dividends paid on ordinary shares - - - - - - (241) (241) - - (241)
Dividends paid to non-controlling interests - - - - - - - - (5) (5)
Credit to equity for equity-settled share-based payments - - - - - - 6 6 - - 6
Shares distributed by the employee benefit trust - - 8 - - - (8) - - - -
Shares acquired by employee benefit trust - - (11) - - - - (11) - - (11)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (12) (12) - - (12)
At 30 June 2021 100 5 (9) 72 1,819 42 4,069 6,098 494 387 6,979
Condensed statement of consolidated changes in equity
For the year ended 31 December 2021
Share capital (note 8) Share premium Shares held by the employee benefit trust Foreign currency translation reserve Merger Other reserves (note 9) Retained earnings Total Tier 1 Non-controlling interests (note 10) Total equity
£m
£m
£m
£m
relief reserve
£m
£m
Notes
£m
£m
£m £m
£m
At 1 January 2021 100 4 (6) 102 1,819 48 4,970 7,037 494 341 7,872
(Loss)/profit for the year - - - - - - (837) (837) - 128 (709)
Other comprehensive (expense)/income for the year - - - (31) - 8 143 120 - - 120
Total comprehensive (expense)/income - - - (31) - 8 (694) (717) - 128 (589)
for the year
Issue of ordinary share capital, net of associated commissions and expenses - 2 - - - - - 2 - - 2
Dividends paid on ordinary shares - - - - - - (482) (482) - - (482)
Dividends paid to non-controlling interests - - - - - - - - - (9) (9)
Credit to equity for equity-settled share-based payments - - - - - - 14 14 - - 14
Shares distributed by the employee benefit trust - - 10 - - - (10) - - - -
Shares acquired by the employee benefit trust - - (16) - - - - (16) - - (16)
Coupon paid on Tier 1 Notes, - - - - - - (23) (23) - - (23)
net of tax relief
At 31 December 2021 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
Condensed statement of consolidated cash flows
For the half year ended 30 June 2022
Notes Half year ended Half year ended Year ended
30 June 2022
30 June 2021
31 December 2021
£m
£m
£m
Cash flows from operating activities
Cash generated/(utilised) by operations 15 2,128 (1,252) (871)
Taxation paid (138) (104) (149)
Net cash flows from operating activities 1,990 (1,356) (1,020)
Cash flows from investing activities
Proceeds from completion of abrdn plc transaction 2.1 - 115 115
Disposal of Ark life, net of cash disposed - - 189
Net cash flows from investing activities - 115 304
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and 2 1 2
expenses
Ordinary share dividends paid 7 (248) (241) (482)
Dividends paid to non-controlling interests 10 (5) (5) (9)
Repayment of policyholder borrowings (23) (9) (18)
Repayment of shareholder borrowings - (200) (322)
Repayment of lease liabilities (7) (6) (16)
Proceeds from new policyholder borrowings, net of associated expenses 37 - 17
Coupon paid on Tier 1 Notes (14) (14) (29)
Interest paid on shareholder borrowings (119) (124) (237)
Net cash flows from financing activities (377) (598) (1,094)
Net increase/(decrease) in cash and cash equivalents 1,613 (1,839) (1,810)
Cash and cash equivalents at the beginning of the period 9,188 10,998 10,998
(before reclassification of cash and cash equivalents held for sale)
Total cash and cash equivalents 10,801 9,159 9,188
Less: cash and cash equivalents of operations classified as held for sale 2 (63) (47) (76)
Cash and cash equivalents at the end of the period 10,738 9,112 9,112
Notes to the condensed consolidated interim financial statements
1. Basis of preparation
The condensed consolidated interim financial statements ('the interim
financial statements') for the half year ended 30 June 2022 comprise the
interim financial statements of Phoenix Group Holdings plc ('the Company') and
its subsidiaries (together referred to as 'the Group') as set out on pages 29
to 61 and were authorised by the Board of Directors for issue on 12 August
2022. The interim financial statements are unaudited but have been reviewed by
our auditors, Ernst & Young LLP and their review report appears on page
28.
The interim financial statements have been prepared on a going concern basis
and on a historical cost basis except for investment property, owner-occupied
property and those financial assets and financial liabilities (including
derivative instruments) that have been measured at fair value.
The interim financial statements are presented in sterling (£) rounded to the
nearest million except where otherwise stated.
Assets and liabilities are offset and the net amount reported in the condensed
statement of consolidated 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 condensed
consolidated income statement unless required or permitted by an International
Financial Reporting Standard ('IFRS') or interpretation, as specifically
disclosed in the accounting policies of the Group.
The interim financial statements have been prepared in accordance with IAS 34
Interim Financial Reporting as adopted by the UK. The accounting policies
applied in the interim financial statements are consistent with those set out
in the 2021 consolidated financial statements.
The interim financial statements do not include all the information and
disclosures required in the 2021 consolidated financial statements, and should
be read in conjunction with the Group's 2021 Annual Report and Accounts, which
have been prepared in accordance with UK adopted international accounting
standards.
In preparing the interim financial statements the Group has adopted the
following standards, interpretations and amendments effective from 1 January
2022:
· Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37);
· Reference to the Conceptual Framework (Amendments to IFRS 3);
· Property, Plant and Equipment: Proceeds before Intended Use (Amendments
to IAS 16); and
· Annual Improvements (2018-2020 Cycle):
- Subsidiary as a First-time Adopter (Amendments to IFRS 1);
- Fees in the '10 per cent' Test for Derecognition of Financial Liabilities
(Amendments to IFRS 9);
- Lease Incentives (Amendments to IFRS 16); and
- Taxation in Fair Value Measurements (Amendments to IAS 41).
None of the above interpretations and amendments to standards are considered
to have a material effect on these interim financial statements. The Group has
not early adopted any other standard, interpretation or amendment that has
been issued but is not yet effective.
The IFRS 17 Insurance Contracts standard will become effective from 1 January
2023. Once effective IFRS 17 will replace IFRS 4, the current insurance
contracts standard, and it is expected to significantly change the way the
Group measures and reports its insurance contracts. The overall objective of
the new standard is to provide an accounting model for insurance contracts
that is more useful and consistent for users. IFRS 17 was endorsed by the UK
Endorsement Board in May 2022.
Note A5 of the Group's 2021 Annual Report and Accounts sets out the nature of
the changes IFRS 17 will introduce. Reasonable estimates of the impact of
the introduction of IFRS 17 are not yet available.
The focus of the Group's implementation programme during 2022 is on completing
and embedding the operational capabilities, determining the transition balance
sheet as at 1 January 2022 and preparing the comparatives required for 2023
reporting. The Group anticipates disclosing the impact of the introduction
of IFRS 17 within its 2022 Annual Report and Accounts.
These interim financial statements do not comprise statutory accounts within
the meaning of section 434 of the Companies Act 2006. Statutory accounts for
the year ended 31 December 2021 were delivered to the Registrar of Companies.
The report of the auditor on those accounts was unqualified, did not contain
an emphasis of matter paragraph and did not contain any statement under
section 498 of the Companies Act 2006.
Going concern
As part of the Directors' consideration of the appropriateness of adopting the
going concern basis for the preparation of the interim financial statements,
the Directors have assessed whether the Group can meet its obligations as they
fall due and can continue to meet its solvency requirements over a period of
at least twelve months from the approval of this report.
The board performs a comprehensive assessment of whether the Group and the
Company are a going concern and as part of this assessment the Board has
considered financial projections over the period to 30 September 2023, which
demonstrate the ability of the Group to withstand market shocks in a range of
severe but plausible stress scenarios. In assessing the appropriateness of
the going concern basis, the Board considered base case liquidity and solvency
projections that incorporate a best estimate of credit downgrade experience.
In addition, severe but plausible stress scenarios were also modelled. The
projections demonstrate that appropriate levels of capital would remain in the
Life Companies under both the base and reasonably foreseeable stress
scenarios, thus supporting cash generation in the going concern period, and
note the Group's access to additional funding through its undrawn £1.25
billion Revolving Credit Facility.
As a result of the above assessment, these interim financial statements have
been prepared on the basis that the Group will continue to operate as a going
concern. The Directors consider that there are no material uncertainties that
may cast significant doubt over this assumption. They have formed a judgement
that there is a reasonable expectation that the Group has adequate resources
to continue in operational existence for the period covered by the assessment.
.
2. Significant transactions
2.1 Agreement with abrdn plc
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership, enabling the Group
to control its own distribution, marketing and brands, and focusing the
Strategic Partnership on using abrdn plc's asset management services in
support of Phoenix's growth strategy.
Under the terms of the transaction, the Group will sell its UK investment and
platform-related products, comprising Wrap Self Invested Personal Pension
('Wrap SIPP'), Onshore Bond and UK Trustee Investment Plan ('TIP') to abrdn
plc and effective from 1 January 2021 has transferred the economic benefit of
this business to abrdn plc. The Group also acquired ownership of the Standard
Life brand and as part of this acquisition, the relevant marketing,
distribution and data team members transferred to the Group. As a result, the
Client Service and Proposition Agreement ('CSPA'), entered into between the
two groups following the acquisition of the Standard Life businesses in 2018,
has been dissolved and the CSPA intangible has been fully impaired . In
addition, Phoenix and abrdn plc resolved all legacy issues in relation to the
Transitional Service Agreement ('TSA') entered into at the time of the
acquisition of the Standard Life businesses and the CSPA.
The Group received cash consideration for the overall transaction of £115
million. On completion of the agreement the Group recognised a gain on the
transaction of £89 million, net of tax of £21 million, in the condensed
consolidated income statement.
The sale of the Wrap SIPP, Onshore Bond and TIP business currently within
Standard Life Assurance Limited, will be effected through a Part VII transfer.
The economic risk and rewards for this business transferred to abrdn plc
effective from 1 January 2021 via a profit transfer arrangement. Consideration
received of £62 million in respect of this business has been deferred until
completion of the Part VII and the payments to abrdn plc in respect of the
profit transfer arrangement are being offset against the deferred
consideration balance.
The balances in the condensed statement of consolidated financial position
relating to the Wrap SIPP, Onshore Bond and TIP business have been classified
as a disposal group held for sale. The total proceeds of disposal are not
expected to exceed the carrying value of the related net assets and
accordingly the disposal group has been measured at fair value less costs to
sell. At the date of the transaction an impairment loss of £59 million was
recognised upon classification of the business as held for sale in respect of
the acquired in-force business ('AVIF'). Amortisation of £6 million has
been recognised in the period (half year ended 30 June 2021: £3 million; year
ended 31 December 2021: £8 million). The major classes of assets and
liabilities classified as held for sale are as follows:
30 June 2022 30 June 2021 31 December 2021
£m
£m
£m
Acquired in-force business 48 60 54
Investment property 3,444 3,537 3,309
Financial assets 5,423 6,565 6,507
Deferred tax assets - 12 -
Cash and cash equivalents 63 38 76
Assets classified as held for sale 8,978 10,212 9,946
Assets in consolidated funds1 1,502 1,798 1,788
Total assets of the disposal group 10,480 12,010 11,734
Investment contract liabilities (10,428) (11,934) (11,676)
Other financial liabilities (4) (3) (4)
Provisions - (2) (2)
Deferred tax liabilities (9) (11) (10)
Accruals and deferred income (48) (60) (54)
Liabilities classified as held for sale (10,489) (12,010) (11,746)
1 Included in assets of the disposal group are assets in consolidated
funds, which are held to back investment contract liabilities of the Wrap
SIPP, Onshore bond and TIP business and are disclosed within financial assets
in the condensed consolidated statement of financial position. The Group
controls these funds at each reporting date and therefore consolidates 100% of
the assets with any non-controlling interest recognised as net asset value
attributable to unitholders.
2.2 Disposal of Ark Life
On 1 November 2021, the Group completed the sale of its entire interest in Ark
Life Assurance Company DAC ('Ark Life') to Irish Life Group Limited for gross
cash consideration of €230 million (£198 million). The carrying value of
the net assets disposed of was £201 million which is after an impairment loss
of £18 million in respect of AVIF that was recognised upon classification of
the business as held for sale.
31 December 2021
£m
Cash consideration received 198
Less: transaction costs (6)
Net consideration received 192
Net assets disposed of (201)
Foreign currency translation reserve recycled to the consolidated income (14)
statement
Loss on disposal (23)
At 30 June 2021, the Ark Life disposal group included assets held for sale of
£2,507 million (financial assets: £1,825 million; reinsurers share of
insurance contract liabilities: £658 million; other receivables: £15
million; and cash and cash equivalents: £9 million), liabilities held for
sale of £ 2,356 million (insurance contract liabilities: £728 million;
investment contract liabilities: £1,590 million; deferred tax liabilities:
£3 million; and other liabilities: £35 million) and assets in consolidated
funds of £46 million.
3. Segmental analysis
The Group defines and presents operating segments in accordance with IFRS 8
Operating Segments which requires such segments to be based on the information
which is provided to the Board, and therefore segmental information in this
note is presented on a different basis from profit or loss in the interim
financial statements.
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. The Group has four reportable segments comprising
UK Heritage, UK Open, Europe and Management Services. For reporting purposes,
business units are aggregated where they share similar economic
characteristics including the nature of products and services, types of
customers and the nature of the regulatory environment. No such aggregation
has been required in the current year.
The UK Heritage segment contains UK businesses which no longer actively sell
products to policyholders and which therefore run-off gradually over time.
These businesses will accept incremental premiums on in-force policies.
The UK Open segment includes new and in-force life insurance and investment
policies in respect of products that the Group continues to actively market to
new and existing policyholders. This includes products such as workplace
pensions and Self-Invested Personal Pensions ('SIPPs'), products sold under
the SunLife brand, and annuities, including Bulk Purchase Annuity contracts.
The Europe segment includes business written in Ireland and Germany. This
includes products that are actively being marketed to new policyholders, and
legacy in-force products that are no longer being sold to new customers.
The Management Services segment comprises income from the life and holding
companies in accordance with the respective management service agreements less
fees related to the outsourcing of services and other operating costs.
Unallocated Group includes consolidation adjustments and Group financing
(including finance costs) which 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. Segmental results include those
transfers between business segments which are then eliminated on
consolidation.
The business of Ark Life, which was disposed of in November 2021 (see note
2.2), was allocated to the Heritage operating segment. The Wrap SIPP, Onshore
Bond and TIP business that has been classified as a disposal group held for
sale (see note 2.1) is allocated to the Open operating segment.
Segmental measure of performance: Operating profit
The Group uses a non-GAAP measure of performance, being operating profit, to
evaluate segmental performance. Operating profit is considered to provide a
comparable measure of the underlying performance of the business as it
excludes the impact of short-term economic volatility and other one-off items.
This measure incorporates an expected return, including a longer-term return
on financial investments backing shareholder and policyholder funds over the
period, with consistent allowance for the corresponding expected movement in
liabilities. Annuity new business profits are included in operating profit
using valuation assumptions consistent with the pricing of the business
(including the Company's expected longer-term asset allocation backing the
business).
The determination of operating profit is as described in note B1 of the
Group's 2021 consolidated financial statements.
3.1 Segmental result
Half year ended Half year ended Year ended
30 June
30 June
31 December
2022
2021
2021
£m
£m
£m
Operating profit
UK Heritage 280 375 537
UK Open 267 148 701
Europe 20 30 87
Management Services (26) 2 (24)
Unallocated Group (34) (28) (71)
Total segmental operating profit 507 527 1,230
Investment return variances and economic assumption changes on long-term (1,076) (824) (1,125)
business and owners' funds
Amortisation and impairment of acquired in-force business (248) (288) (572)
Amortisation and impairment of other intangibles (10) (11) (67)
Other non-operating items (280) 28 (65)
Finance costs attributable to owners (103) (111) (217)
Loss before the tax attributable to owners of the parent (1,210) (679) (816)
Profit before tax attributable to non-controlling interests 31 51 128
Loss before the tax attributable to owners (1,179) (628) (688)
Other non-operating items in respect of the half year ended 30 June 2022
include:
· £146 million related to the increase in expected costs associated with
the delivery of the Group Target Operating Model for IT and Operations,
following a strategic decision to re-phase the programme, together with the
costs of migrating policyholder administration onto the TCS platform for
certain legacy portfolios of business;
· £47 million of costs associated with the implementation of IFRS 17,
which will be effective from 1 January 2023;
· costs of £20 million associated with the ongoing ReAssure integration
programme;
· £10 million costs associated with a strategic initiative to enhance
capabilities in relation to regulatory approvals which will support the move
towards the Group's strategic asset allocation alongside growth delivered
through bulk purchase annuity transactions;
· £37 million of other corporate project costs; and
· net other one-off items totalling a cost of £20 million.
Other non-operating items in respect of the half year ended 30 June 2021
include:
· a net £110 million gain arising on the transaction with abrdn plc, which
included the sale of the Group's UK investment and platform related products
and the acquisition by the Group of the Standard Life brand (see note 2.1 for
further details);
· £35 million related to the increase in expected costs associated with
the delivery of the Group Target Operating Model for IT and Operations;
· £14 million of costs associated with the ongoing ReAssure integration
programme;
· costs of £9 million associated with the on-going integration of the Old
Mutual Wealth business acquired by ReAssure Group plc in December 2019, and
incurred since the beginning of this year;
· £27 million of other corporate project costs; and
· net other one-off items totalling an income of £3 million.
Other non-operating items in respect of the year ended 31 December 2021
include:
· a net £110 million gain arising on the transaction with abrdn plc, which
included the sale of the Group's UK investment and platform related products
and the acquisition by the Group of the Standard Life brand (see note 2.1 for
further details);
· a loss on disposal of £23 million arising on the sale of Ark Life
Assurance Company DAC ('Ark Life') (see note 2.2 for further details);
· £35 million related to the increase in provision for costs associated
with the delivery of the Group Target Operating Model for IT and Operations;
· £45 million of costs associated with the ongoing ReAssure integration
programme; costs of £27 million associated with the integration of the Old
Mutual Wealth business acquired by ReAssure Group plc in December 2019 and
costs of £12 million associated with the integration of the acquired L&G
mature savings business;
· an £83 million policyholder tax benefit recognised following the
favourable conclusion of discussions with HMRC in respect of certain excess
management expenses associated with the L&G mature savings business;
· £58 million of costs associated with the implementation of IFRS 17,
which will be effective from 1 January 2023;
· £44 million of other corporate project costs; and
· net other one-off items totalling a cost of £14 million.
Further details of the investment return variances and economic assumption
changes on long-term business and the variance on owners' funds are included
in note 4.
3.2 Segmental revenue
Half year ended 30 June 2022 UK Heritage UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 428 2,080 673 - - 3,181
Less: premiums ceded to reinsurers (139) (822) (9) - - (970)
Net premiums written 289 1,258 664 - - 2,211
Fees and commissions 295 156 31 - - 482
Income from other segments - - - 605 (605) -
Total segmental revenue 584 1,414 695 605 (605) 2,693
Of the revenue from external customers presented in the table above for the
half year ended 30 June 2022, £2,250 million is attributable to customers in
the United Kingdom ('UK') and £443 million to the rest of the world. The
Europe operating segment comprises business written in Ireland and Germany to
customers in both Europe and the UK. No revenue transaction with a single
customer external to the Group amounts to greater than 10% of the Group's
revenue.
The Group has total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts) as
at 30 June 2022 of £5,022 million located in the UK and £418 million located
in the rest of the world.
Half year ended 30 June 2021 UK Heritage UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 485 928 726 - - 2,139
Less: premiums ceded to reinsurers (163) (351) (12) - - (526)
Net premiums written 322 577 714 - - 1,613
Fees and commissions 318 146 26 - - 490
Income from other segments - - - 404 (404) -
Total segmental revenue 640 723 740 404 (404) 2,103
Of the revenue from external customers presented in the table above for the
half year ended 30 June 2021, £1,685 million is attributable to customers in
the United Kingdom ('UK') and £418 million to the rest of the world. The
Europe operating segment comprises business written in Ireland and Germany to
customers in both Europe and the UK. No revenue transaction with a single
customer external to the Group amounts to greater than 10% of the Group's
revenue.
The Group has total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts) as
at 30 June 2021 of £4,281 million located in the UK and £439 million located
in the rest of the world.
Year ended 31 December 2021 UK Heritage UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 880 5,034 1,541 - - 7,455
Less: premiums ceded to reinsurers (284) (1,739) (56) - - (2,079)
Net premiums written 596 3,295 1,485 - - 5,376
Fees and commissions 634 297 70 - - 1,001
Income from other segments - - - 1,146 (1,146) -
Total segmental revenue 1,230 3,592 1,555 1,146 (1,146) 6,377
Of the revenue from external customers presented in the table above for the
year ended 31 December 2021, £5,448 million is attributable to customers in
the UK and £929 million to the rest of the world. The Europe operating
segment comprises business written in Ireland and Germany to customers in both
Europe and the UK. No revenue transaction with a single customer external to
the Group amounts to greater than 10% of the Group's revenue.
The Group had total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts) as
at 31 December 2021 of £5,245 million located in the UK and £410 million
located in the rest of the world.
4. 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. The methodology for the determination of the expected
investment return is explained below together with an analysis of investment
return variances and economic assumption changes recognised outside of
operating profit.
4.1 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 long-term risk-free rate used as a basis for deriving the long-term
investment return is set by reference to the swap curve at the 15-year
duration plus 36bps at the start of the period (half year ended 30 June 2021
and year ended 31 December 2021: 10bps). A risk premium of 334bps is added to
the risk-free yield for equities (30 June 2021 and 31 December 2021: 349bps),
244bps for properties (30 June 2021 and 31 December 2021: 249bps) and 52bps
for corporate bonds (30 June 2021 and 31 December 2021: 55bps). The overall
increase in expected returns for these assets primarily reflects the increase
in the risk-free rate experienced in 2021.
The principal assumptions underlying the calculation of the long-term
investment return are:
Half year ended Half year ended Year ended
30 June
30 June
31 December
2022
2021
2021
%
%
%
Equities 4.6 4.1 4.1
Properties 3.7 3.1 3.1
Corporate bonds 1.8 1.2 1.2
4.2 Investment return variances and economic assumption changes recognised
outside of operating profit 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. 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 investment return variances and economic assumption changes excluded from
the long-term business operating profit are as follows:
Half year ended Half year ended Year ended
30 June
30 June
31 December
2022
2021
2021
£m
£m
£m
Investment return variances and economic assumption changes on long-term (1,076) (824) (1,125)
business
The net adverse investment return variances and economic assumption changes on
long-term business of £1,076 million in the first half of 2022 (half year
ended 30 June 2021: adverse £824 million; year ended 31 December 2021:
adverse £1,125 million) primarily reflect IFRS losses arising on life company
hedging positions.
The impact of equity, interest rate and inflation movements on future profits
in relation to with-profit bonuses and unit linked charges is hedged in order
to benefit the regulatory capital position rather than the IFRS net assets.
The impact of market movements on the value of the related hedging instruments
is reflected in the IFRS results, but the corresponding change in the value of
future profits or Solvency Capital Requirements is not. Such items are
actively valued under Solvency II requirements but are either not recognised
on an IFRS basis or are not revalued unless there is evidence of impairment
(e.g. AVIF). This leads to volatility in the Group's IFRS results.
Losses have been experienced on hedging positions held by the life companies
principally as a result of rising yields and increasing inflation in the
period. Continued strategic asset allocation initiatives undertaken by the
Group, including investment in higher yielding assets, together with gains
arising on equity hedges as markets fell over the period, provided a partial
offset to the adverse variances experienced.
5. Tax (credit)/charge
5.1 Current period tax (credit)/charge
Income tax comprises current and deferred tax. Income tax is recognised in the
condensed consolidated income statement except to the extent that it relates
to items recognised in the condensed statement of consolidated comprehensive
income or the condensed 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 period, using tax rates and laws enacted
or substantively enacted at the date of the condensed statement of
consolidated financial position together with adjustments to tax payable in
respect of previous periods. 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 period.
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Current tax:
UK corporation tax 14 (99) (9)
Overseas tax 48 39 114
62 (60) 105
Adjustment in respect of prior periods 5 8 (66)
Total current tax charge/(credit) 67 (52) 39
Deferred tax:
Origination and reversal of temporary differences (764) 109 120
Change in the rate of UK corporation tax (73) 166 147
Write up of deferred tax assets (4) (10) (27)
Total deferred tax (credit)/charge (841) 265 240
Total tax (credit)/charge (774) 213 279
Attributable to:
- policyholders (471) 174 258
- owners (303) 39 21
Total tax (credit)/charge (774) 213 279
The Group, as a proxy for policyholders in the UK, is required to pay taxes on
investment income and gains each period. Accordingly, the tax credit or
expense attributable to UK life assurance policyholder earnings is included in
income tax expense. The tax credit attributable to policyholder earnings is
£471 million (half year ended 30 June 2021: £174 million charge; year ended
31 December 2021: £258 million charge).
5.2 Tax (credited)/charged to other comprehensive income
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Current tax (credit)/charge (5) (1) 1
Deferred tax charge on defined benefit schemes 160 19 137
Total tax charge relating to other comprehensive income items 155 18 138
5.3 Tax credited to equity
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Current tax credit on Tier 1 Notes (3) (3) (6)
Deferred tax on shares schemes - - (1)
Total tax credit to equity (3) (3) (7)
5.4 Reconciliation of tax (credit)/charge
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Loss before tax (1,650) (454) (430)
Policyholder tax credit/(charge) 471 (174) (258)
Loss before the tax attributable to owners (1,179) (628) (688)
Tax credit at standard UK rate of 19%1 (224) (119) (131)
Non-taxable income and gains2 (5) (7) (10)
Disallowable expenses - 5 19
Prior year tax credit for shareholders3 (3) (3) (7)
Movement on acquired in-force amortisation at rates other than 19% 13 13 34
Profits taxed at rates other than 19%4 (28) (3) (22)
Derecognition/(recognition) of previously unrecognised deferred tax assets5 17 (6) (13)
Deferred tax rate change6 (73) 166 147
Current year losses not valued 4 7 1
Deferred consideration7 - (12) -
Other (4) (2) 3
Owners' tax (credit)/charge (303) 39 21
Policyholder tax (credit)/charge (471) 174 258
Total tax (credit)/charge for the period (774) 213 279
1 The Phoenix operating segments are predominantly in the UK. The
reconciliation of tax credit has therefore, been completed by reference to the
standard rate of UK tax.
2 Primarily relates to non-taxable income and gains on pension schemes.
3 The prior year tax credit relates to true-ups from the 2021 tax
reporting provisions in various entities within the group.
4 Profits taxed at rates other than 19% relates to life company profits
which are also subject to marginal policyholder tax rates and profits subject
to non UK tax rates.
5 Relates primarily to increased tax losses in Standard Life
International DAC in relation to which a deferred tax asset cannot be
recognised.
6 Deferred tax rate change relates primarily to movements in deferred
tax liabilities on non-refundable pension scheme surplus which are expected to
unwind at rates in excess of the current year rate of 19%.
7 The 2021 tax credit relates to deferred consideration proceeds in
respect of a new agreement with abrdn plc.
The standard rate of UK corporation tax for the half year ended 30 June 2022
is 19% (half year ended 30 June 2021 and year ended 31 December 2021: 19%). An
increase from the current 19% UK corporation tax rate to 25%, effective from 1
April 2023, was announced in the 2021 Budget which was substantively enacted
on 24 May 2021. These new tax rates apply where appropriate for calculating
deferred tax for the 2022 interim financial statements. Deferred income tax
assets are recognised for tax losses carried forward only to the extent that
realisation of the related tax benefit is probable.
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 142 50 55
Excess expenses and deferred acquisition costs - 7 9
Intangibles 11 12 9
Deferred tax assets not recognised on capital losses 32 45 29
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.
6. Earnings per share
The Group calculates its basic earnings per share based on the present shares
in issue using the earnings attributable to ordinary equity holders of the
parent, divided by the weighted average number of ordinary shares in issue
during the period.
Diluted earnings per share are calculated based on the potential future shares
in issue assuming the conversion of all potentially dilutive ordinary shares.
The weighted average number of ordinary shares in issue is adjusted to assume
conversion of dilutive share awards granted to employees.
The basic and diluted earnings per share calculations are also presented based
on the Group's operating profit net of financing costs. Operating profit is a
non-GAAP performance measure that is considered to provide a comparable
measure of the underlying performance of the business as it excludes the
impact of short-term economic volatility and other one-off items.
The result attributable to ordinary equity holders of the parent for the
purposes of computing earnings per share has been calculated as set out below.
Half year ended 30 June 2022 Operating profit Financing costs Operating earnings net of financing costs Other non-operating items Total
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 507 (103) 404 (1,583) (1,179)
Tax (charge)/credit attributable to owners (72) 20 (52) 355 303
Profit/(loss) for the period attributable to owners 435 (83) 352 (1,228) (876)
Coupon paid on Tier 1 notes, net of tax relief - (12) (12) - (12)
Deduct: Share of result attributable to non-controlling interests - - - (31) (31)
Profit/(loss) for the period attributable to ordinary equity holders of the 435 (95) 340 (1,259) (919)
parent
Half year ended 30 June 2021 Operating profit Financing costs Operating earnings net of financing costs Other non-operating items Total
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 527 (111) 416 (1,044) (628)
Tax (charge)/credit attributable to owners (110) 23 (87) 48 (39)
Profit/(loss) for the period attributable to owners 417 (88) 329 (996) (667)
Coupon paid on Tier 1 notes, net of tax relief - (12) (12) - (12)
Deduct: Share of result attributable to non-controlling interests - - - (51) (51)
Profit/(loss) for the period attributable to ordinary equity holders of the 417 (100) 317 (1,047) (730)
parent
Year ended 31 December 2021 Operating profit Financing costs Operating earnings net of financing costs Other non-operating items Total
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 1,230 (217) 1,013 (1,701) (688)
Tax (charge)/credit attributable to owners (243) 44 (199) 178 (21)
Profit/(loss) for the year attributable to owners 987 (173) 814 (1,523) (709)
Coupon paid on Tier 1 notes, net of tax relief - (23) (23) - (23)
Deduct: Share of result attributable to non-controlling interests - - - (128) (128)
Profit/(loss) for the year attributable to ordinary equity holders 987 (196) 791 (1,651) (860)
of the parent
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
Half year ended 30 June 2022 Number Half year ended Year ended
million
30 June 2021
31 December 2021 Number
Number
million
million
Issued ordinary shares at beginning of the period 1,000 999 999
Own shares held by employee benefit trust (2) (1) (1)
Weighted average number of ordinary shares 998 998 998
The diluted weighted average number of ordinary shares outstanding during the
period is 1,001 (half year ended 30 June 2021: 1,001 million; year ended 31
December 2021: 1,001 million). The Group's long-term incentive plan, deferred
bonus share scheme and sharesave schemes increased the weighted average number
of shares on a diluted basis by 2,606,242 shares for the half year ended 30
June 2022 (half year ended 30 June 2021: 2,661,475; year ended 31 December
2021: 2,702,934 shares). As losses have an anti-dilutive effect, none of the
share-based awards have a dilutive effect in the calculation of basic earnings
per share for all periods presented.
Earnings per share disclosures are as follows:
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
pence
pence
31 December 2021
pence
Basic earnings per share (92.0) (73.3) (86.4)
Diluted earnings per share (92.0) (73.3) (86.4)
Basic operating earnings net of financing costs per share 33.9 31.9 79.2
Diluted operating earnings net of financing costs per share 33.9 31.8 79.0
7. Dividends on ordinary shares
Half year ended Half year ended 30 June 2021 Year ended
30 June 2022
£m
31 December 2021
£m
£m
Dividend declared and paid 248 241 482
On 11 March 2022, the Board recommended a final dividend of 24.8p per share in
respect of the year ended 31 December 2021. The dividend was approved at the
Company's Annual General Meeting, which was held on 5 May 2022. The dividend
amounted to £248 million and was paid on 9 May 2022.
8. Share capital
30 June 2022 30 June 2021 31 December 2021
£m
£m
£m
Issued and fully paid:
1,000.0 million (30 June 2021: 999.4 million; 31 December 2021: 999.5 million) 100 100 100
ordinary shares of £0.10 each
Movements in share capital during the period:
2022 Number £
Shares in issue at 1 January 2022 999,536,058 99,953,605
Ordinary shares issued in the period 453,792 45,379
Shares in issue at 30 June 2022 999,989,850 99,998,984
During the period, the Company issued 453,792 shares at a total premium of £2
million in order to satisfy its obligation to employees under the Group's
sharesave schemes.
2021 Number £
Shares in issue at 1 January 2021 999,232,144 99,923,214
Ordinary shares issued in the period 152,810 15,281
Shares in issue at 30 June 2021 999,384,954 99,938,495
Ordinary shares issued in the period 151,104 15,110
Shares in issue at 31 December 2021 999,536,058 99,953,605
During the year ended 31 December 2021, 303,914 shares were issued at a
premium of £2 million (half year ended 30 June 2021: 152,810 million were
issued at a premium of £1 million) in order to satisfy obligations to
employees under the Group's sharesave schemes.
9. Other reserves
2022 Owner-occupied property revaluation reserve Cash flow hedging reserve Total other reserves
£m
£m
£m
At 1 January 2022 5 51 56
Other comprehensive expense for the period - (28) (28)
At 30 June 2022 5 23 28
2021 Owner-occupied property revaluation reserve Cash flow Total other reserves
£m
£m
hedging reserve
£m
At 1 January 2021 5 43 48
Other comprehensive income for the period - (6) (6)
At 30 June 2021 5 37 42
Other comprehensive expense for the period - 14 14
At 31 December 2021 5 51 56
In June 2021, the Group entered into four cross currency swaps which were
designated as hedging instruments in order to effect cash flow hedges of the
Group's Euro and US Dollar denominated borrowings. Hedge accounting has been
adopted effective from the date of designation of the hedging relationship.
The effective portion of changes in the fair value of these derivatives is
recognised in other comprehensive income and accumulates within the cash flow
hedging reserve. The gain or loss relating to the ineffective portion is
recognised immediately in profit or loss, and is included in net investment
income. Amounts previously recognised in other comprehensive income and
accumulated in equity are reclassified to profit or loss in the periods when
the hedged item affects profit or loss, in the same line as the recognised
hedged item.
10. Non-controlling interests
2022 APEOT
£m
At 1 January 2022 460
Profit for the period 31
Dividends paid (5)
At 30 June 2022 486
2021 APEOT
£m
At 1 January 2021 341
Profit for the period 51
Dividends paid (5)
At 30 June 2021 387
Profit for the period 77
Dividends paid (4)
At 31 December 2021 460
The non-controlling interests of £486 million (half year ended 30 June 2021:
£387 million; year ended 31 December 2021: £460 million) reflects third
party ownership of abrdn Private Equity Opportunities Trust plc ('APEOT')
(formerly known as Standard Life Private Equity Trust plc) determined at the
proportionate value of the third party interest in the underlying assets and
liabilities. APEOT is a UK Investment Trust listed and traded on the London
Stock Exchange. As at 30 June 2022, the Group held 55.2% of the issued share
capital of APEOT (30 June 2021: 55.2%; 31 December 2021: 55.2%).
The Group's interest in APEOT is held in the with-profit and unit-linked funds
of the Group's life companies. Therefore the shareholder exposure to the
results of APEOT is limited to the impact of those results on the shareholder
share of distributed profits of the relevant fund.
11. Pension schemes
The condensed statement of consolidated financial position incorporates the
pension scheme assets and liabilities of the PGL Pension Scheme, the Pearl
Group Staff Pension Scheme ('Pearl Scheme'), the Abbey Life Staff Pension
Scheme, the ReAssure Staff Pension Scheme and the ReAssure Private Retirement
Trust as at 30 June 2022.
The PGL Pension Scheme previously entered into 'buy-in' agreements with
Phoenix Life Limited ('PLL') in 2016 and 2019, which on completion, covered
all the pensioner and deferred members of the Scheme. Plan assets were
transferred to a collateral account and this transfer constituted the payment
of premium to PLL. These assets are recognised in the relevant line within
financial assets in the condensed statement of consolidated financial
position. The economic effect of these transactions in the Scheme is to
replace the plan assets transferred with a single line insurance policy
reimbursement asset which is eliminated on consolidation.
The economic surplus of the PGL Pension Scheme amounted to £26 million (30
June 2021: £30 million; 31 December 2021: £26million). The carrying value of
insurance policies effected by the PGL Pension Scheme with the Group of
£1,230 million (30 June 2021: £1,653 million; 31 December 2021:
£1,618million) is eliminated on consolidation. The remaining economic surplus
is expected to cover future anticipated pension scheme administration expenses
and consequently no deduction for the provision for tax on that part of the
economic surplus available as a refund on a winding-up of the scheme has been
made. The resulting net pension scheme liability of the PGL Pension Scheme
amounted to £1,204 million (30 June 2021: £1,623 million; 31 December 2021:
£1,592million). The value of the collateral assets disclosed within financial
assets in the condensed statement of consolidated financial position is
£1,548 million (30 June 2021: £2,052 million;
31 December 2021: £2,084 million).
On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with
Pearl Group Holdings (No.2) Limited to complete a series of buy-ins that are
scheduled to be executed by 31 December 2023. At the same time, the Pearl
Scheme completed the first buy-in with PLL covering 25% of the Scheme's
pensioner in-payment and deferred member liabilities, transferring the
associated risks including longevity improvement risk to PLL effective from 30
September 2020. In July 2021 and October 2021 two further buy-in tranches were
completed, covering a further 35% and 15% respectively of the Scheme's
pensioner in-payment and deferred member liabilities.
In total, the Scheme has transferred £2,232 million of plan assets to PLL as
payment of premium. The assets transferred to PLL are recognised in the
relevant line within financial assets in the condensed statement of
consolidated financial position. The economic effect of the 'buy-in'
transactions in the Scheme is to replace the plan assets transferred with a
single line insurance policy reimbursement asset which is subsequently
eliminated on consolidation. The economic surplus of the Pearl Scheme amounted
to £248 million (30 June 2021: £492 million; 31 December 2021: £263
million) and the carrying value of insurance policies eliminated on
consolidation were £1,277 million (30 June 2021: £564 million; 31 December
2021: £1,680million). The net pension scheme liability of the Pearl Scheme
amounted to £1,116 million (30 June 2021: £245 million; 31 December 2021:
£1,509million) after deduction of the provision for tax on that part of the
economic surplus available as a refund on a winding-up of the scheme.
In March 2022, PLL entered into a quota share reinsurance arrangement with an
external insurer to reinsure a further c.27% of the risks transferred to PLL
as part of the third buy-in transaction with the Pearl Scheme. A total of
c.91% of these liabilities have now been reinsured. A premium of £104 million
was paid by PLL to the reinsurer. As PLL expects to use the claims received to
pay for its obligations under the insurance contract between it and the Pearl
scheme (i.e. to settle the defined benefit obligation) the reinsurance
arrangement is considered to be a non-qualifying insurance policy and is
classified as a reimbursement right. The reinsurance arrangement is expected
to match a proportion of the defined benefit obligation of the Pearl Scheme
therefore the valuation of the reimbursement right is consistent with the
valuation of the associated defined benefit obligation. The value of the
reimbursement right asset amounted to £231 million (31 December 2021: £212
million).
The pension scheme liability of the Abbey Life Staff Pension Scheme amounted
to £1 million (30 June 2021: £52 million liability; 31 December 2021: £1
million asset). Pension scheme assets are stated after deduction of the
provision for tax on that part of the economic surplus available as a refund
on a winding-up of the scheme and after adjusting for the irrecoverable amount
of minimum funding requirement obligations.
The pension scheme asset of the ReAssure Staff Pension Scheme amounted to £34
million after deduction of the provision for tax on that part of the economic
surplus available as a refund on a winding up of the scheme (30 June 2021:
£21 million; 31 December 2021: £35million).
The pension scheme liability of the ReAssure Private Retirement Trust amounted
to £2 million (30 June 2021 and 31 December 2021: £2 million).
12. Liabilities under insurance contracts - assumptions
12.1 Valuation of participating insurance and investment contracts and
contracts with discretionary participation features
For participating business, which is with-profit business (insurance and
investment contracts with discretionary participating features), the insurance
contract liability is calculated on a realistic basis, adjusted to exclude the
shareholders' share of future bonuses and the associated tax liability. 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.
12.2 Valuation of non-participating insurance contracts
The non-participating insurance contract liabilities are determined using
either a net premium or gross premium valuation method.
12.3 Process used to determine assumptions
In determining the discount rate to be applied when calculating participating
and non-participating insurance contract liabilities, the Group uses a
risk-free rate derived from the swap yield curve, plus an illiquidity premium
of 36bps (half year ended 30 June 2021:10bps; year ended 31 December 2021:
36bps). For certain non-participating business, (e.g. annuities) the Group
makes a further explicit adjustment to the risk-free rate to reflect
illiquidity in respect of the assets backing those liabilities.
For participating insurance business in realistic basis companies the
assumptions about future demographic trends represent best estimates. They are
determined after considering the companies' recent experience and/or relevant
industry data. Economic assumptions are market consistent.
For non-participating insurance business, demographic assumptions are derived
by setting assumptions at management's best estimates and recognising an
explicit margin for demographic risks.
During the period, a number of changes were made to assumptions to reflect
changes in expected experience or to reflect transition activity. The impact
of material changes that impacted the result attributable to owners during the
period was as follows:
Increase in insurance liabilities 30 June 2022 (Decrease)/increase in insurance liabilities 30 June 2021 (Decrease)/increase in insurance liabilities 31 December 2021
£m
£m
£m
Change in longevity assumptions - - (272)
Change in persistency assumptions 15 (10) (12)
Change in mortality assumptions - 3 (7)
Change in expense assumptions 121 50 275
At 30 June 2022, the £15 million negative impact of changes in persistency
assumptions reflects the results of the latest experience investigations. The
£121 million negative impact of changes in expense assumptions principally
reflects the increase in reserves for the anticipated costs associated with
the implementation of IFRS 17 and delivery of the Group Target Operating Model
for IT and Operations.
At 30 June 2021, the £50 million impact of changes in expense assumptions
included £35 million in relation to additional costs expected to be incurred
for the delivery of the Group Target Operating Model for IT and Operations.
At 31 December 2021, the £272 million positive impact of changes in longevity
assumptions reflects updates to base and improvement assumptions to reflect
latest experience analyses and the most recent Continuous Mortality
Investigation 2020 projection tables. The £275 million negative impact of
changes in expense assumptions principally reflects the impact of investment
in the Group's growth agenda on the maintenance cost base, including the
development of capabilities within the Group's Open business, asset management
capabilities and within certain Group functions. The increase in reserves also
reflects provision for the anticipated costs associated with the
implementation of IFRS 17 and delivery of the Group Target Operating Model for
IT and Operations.
13. Borrowings
30 June 2022 30 June 2021 31 December 2021
£m
£m
£m
Carrying value
£200 million multi-currency revolving credit facility 37 - 17
Property reversions loan 64 74 70
Total policyholder borrowings 101 74 87
£300 million senior unsecured bond - 122 -
£428 million Tier 2 subordinated notes 427 427 427
£450 million Tier 3 subordinated notes 450 449 450
US $500 million Tier 2 bonds 410 360 368
€500 million Tier 2 bonds 426 424 416
US $750 million Contingent Convertible Tier 1 notes 613 538 551
£500 million Tier 2 notes 487 485 485
US $500 million Fixed Rate Reset Tier 2 notes 409 359 368
£500 million 5.867% Tier 2 subordinated notes 546 553 550
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 263 269 266
£250 million 4.016% Tier 3 subordinated notes 256 258 257
Total shareholder borrowings 4,287 4,244 4,138
Total borrowings 4,388 4,318 4,225
See note 18 for details of movements in the Group's borrowings post 30 June
2022.
14. Financial instruments
14.1 Fair values
The table below sets out a comparison of the carrying amounts and fair values
of financial instruments.
30 June 2022 30 June 2021 31 December 2021
Carrying value Fair value Carrying value Fair value Carrying value Fair value
£m £m £m £m £m £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss ('FVTPL'):
Held for trading - derivatives 3,372 3,372 4,708 4,708 4,571 4,571
Designated upon initial recognition:
Equities 76,002 76,002 86,436 86,436 87,059 87,059
Investment in associate 422 422 444 444 431 431
Debt securities 89,814 89,814 104,310 104,310 106,990 106,990
Collective investment schemes 81,423 81,423 90,489 90,489 90,164 90,164
Reinsurers' share of investment contract liabilities 9,120 9,120 9,732 9,732 10,009 10,009
Financial assets measured at amortised cost:
Loans and deposits 405 405 649 649 475 475
Total financial assets 260,558 260,558 296,768 296,768 299,699 299,699
Less amounts classified as held for sale (see note 2) (5,423) (5,423) (8,390) (8,390) (6,507) (6,507)
Total financial assets less amounts classified as held for sale 255,135 255,135 288,378 288,378 293,192 293,192
30 June 2022 30 June 2021 31 December 2021
Carrying value Fair value Carrying value Fair value Carrying value Fair value
£m £m £m £m £m £m
Financial liabilities measured at carrying and fair values
Financial liabilities at FVTPL:
Held for trading - derivatives 4,093 4,093 1,104 1,104 1,252 1,252
Designated upon initial recognition:
Borrowings 64 64 74 74 70 70
Net asset value attributable to unitholders 3,312 3,312 3,666 3,666 3,568 3,568
Investment contract liabilities 154,764 154,764 170,131 170,131 172,093 172,093
Financial liabilities measured at amortised cost:
Borrowings 4,324 4,172 4,244 4,284 4,155 4,564
Deposits received from reinsurers 2,994 2,994 3,770 3,770 3,569 3,569
Obligations for repayment of collateral received 1,645 1,645 3,482 3,482 3,442 3,442
Total financial liabilities 171,196 171,044 186,471 186,511 188,149 188,558
Less amounts classified as held for sale (see note 2) (10,432) (10,432) (13,527) (13,527) (11,680) (11,680)
Total financial liabilities less amounts classified as held for sale 160,764 160,612 172,944 172,984 176,469 176,878
14.2 Fair value hierarchy
14.2.1 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
exchange traded securities and derivatives) is based on quoted market prices
at the period end provided by recognised pricing services. Market depth and
bid-ask spreads are used to corroborate whether an active market exists for an
instrument. Greater depth and narrower bid-ask spread indicates a higher
liquidity in the instrument and are classed as Level 1 inputs. For collective
investment schemes, fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider
bid-ask spreads which do not meet the classification as Level 1 inputs, are
classified as Level 2. The fair values of financial instruments not traded in
active markets are determined using broker quotes or valuation techniques with
observable market inputs. Financial instruments valued using broker quotes are
classified at Level 2, only where there is a sufficient range of available
quotes. The fair value of over the counter derivatives is estimated using
pricing models or discounted cash flow techniques. Collective investment
schemes where the underlying assets are not priced using active market prices
are determined to be Level 2 instruments. Where pricing models are used,
inputs are based on market related data at the period end. Where discounted
cash flows 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 instruments determined by valuation techniques using
non-observable market inputs are based on a combination of independent third
party evidence and internally developed models. In relation to investments in
hedge funds and private equity investments, non-observable third party
evidence in the form of net asset valuation statements are used as the basis
for the valuation. Adjustments may be made to the net asset valuation where
other evidence, for example recent sales of the underlying investments in the
fund, indicates this is required. Securities that are valued using broker
quotes which could not be corroborated across a sufficient range of quotes are
considered as Level 3. For a number of investment vehicles and debt
securities, standard valuation models are used, as due to their nature and
complexity they have no external market. Inputs into such models are based on
observable market data where applicable. The fair value of loans, derivatives
and some borrowings with no external market is determined by internally
developed discounted cash flow models using appropriate assumptions
corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring
basis, the Group determines whether transfers have occurred between levels in
the hierarchy by re-assessing categorisation (based on the lowest level input
that is significant to the fair value measurement as a whole) during each
reporting period.
14.2.2 Fair value hierarchy of financial instruments measured at fair value
At 30 June 2022
Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial assets measured at fair value
Derivatives 227 2,959 186 3,372
Financial assets designated at FVTPL upon initial recognition:
Equities 73,978 30 1,994 76,002
Investment in associate 422 - - 422
Debt securities 51,417 26,741 11,656 89,814
Collective investment schemes 78,849 2,153 421 81,423
Reinsurers' share of investment contract liabilities 9,120 - - 9,120
213,786 28,924 14,071 256,781
Total financial assets measured at fair value 214,013 31,883 14,257 260,153
Less amounts classified as held for sale (see note 2) (4,375) (133) (915) (5,423)
Total financial assets measured at fair value less amounts classified as held 209,638 31,750 13,342 254,730
for sale
Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 122 3,747 224 4,093
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 64 64
Net asset value attributable to unitholders 3,312 - - 3,312
Investment contract liabilities - 154,764 - 154,764
3,312 154,764 64 158,140
Total financial liabilities measured at fair value 3,434 158,511 288 162,233
Less amounts classified as held for sale (see note 2) (1) (10,431) - (10,432)
Total financial liabilities measured at fair value less amounts classified as 3,433 148,080 288 151,801
held for sale
At 30 June 2021
Level 1 Level 2 Level 3 Total fair value
Restated1
£m
Restated1
£m
£m
£m
Financial assets measured at fair value
Derivatives 296 4,172 240 4,708
Financial assets designated at FVTPL upon initial recognition:
Equities 84,696 54 1,686 86,436
Investment in associate 444 - - 444
Debt securities 68,269 25,232 10,809 104,310
Collective investment schemes 88,018 2,157 314 90,489
Reinsurers' share of investment contract liabilities 9,732 - - 9,732
Total financial assets measured at fair value 251,159 27,443 12,809 291,411
Less amounts classified as held for sale (see note 2)(1) (7,304) (234) (852) (8,390)
Total financial assets measured at fair value, excluding amounts classified as 244,151 31,381 12,197 287,729
held for sale
1 The fair value hierarchy for the financial assets classified as held for
sale as at 30 June 2021 has been restated to reclassify £844 million of debt
securities from Level 1 to Level 3.
Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 83 906 115 1,104
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 74 74
Net asset value attributable to unitholders 3,666 - - 3,666
Investment contract liabilities - 170,131 - 170,131
3,666 170,131 74 173,871
Total financial liabilities measured at fair value 3,749 171,037 189 174,975
Less amounts classified as held for sale (see note 2) (1) (13,526) - (13,527)
Total financial liabilities measured at fair value less amounts classified as 3,748 157,511 189 161,448
held for sale
At 31 December 2021
Level 1 Level 2 Level 3 Total fair value
Restated1
Restated1
£m
£m
£m
£m
Financial assets measured at fair value
Derivatives 161 4,173 237 4,571
Financial assets designated at FVTPL upon initial recognition:
Equities 85,108 52 1,899 87,059
Investment in associate 431 - - 431
Debt securities 57,992 36,546 12,452 106,990
Collective investment schemes 87,277 2,601 286 90,164
Reinsurers' share of investment contract liabilities 10,009 - - 10,009
240,817 39,199 14,637 294,653
Total financial assets measured at fair value 240,978 43,372 14,874 299,224
Less Amounts classified as held for sale (see note 2) (5,194) (421) (892) (6,507)
Total financial assets measured at fair value, excluding amounts classified as 235,784 42,951 13,982 292,717
held for sale
1 The fair value hierarchy as at 31 December 2021 has been restated to
reclassify £1,033 million of Collective investment schemes from Level 2 to
Level 1.
Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 155 972 125 1,252
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 70 70
Net asset value attributable to unitholders 3,568 - - 3,568
Investment contract liabilities - 172,093 172,093
3,568 172,093 70 175,731
Total financial liabilities measured at fair value 3,723 173,065 195 176,983
Less amounts classified as held for sale - (11,680) - (11,680)
Total financial liabilities measured at fair value, excluding amounts 3,723 161,385 195 165,303
classified as held for sale
14.2.3 Level 3 financial instrument sensitivities
Level 3 investments in equities (including private equity and unlisted
property investment vehicles) and collective investment schemes (including
hedge funds) are valued using net asset statements provided by independent
third parties, and therefore no sensitivity analysis has been prepared.
Debt securities
Analysis of Level 3 debt securities 30 June 30 June 31 December
2022
2021
2021
Restated
Restated
£m
£m
£m
Unquoted corporate bonds:
Loans guaranteed by export credit agencies & supranationals1 348 220 219
Private corporate credit1 1,285 1,433 1,488
Infrastructure loans - project finance1 850 805 967
Infrastructure loans - corporate1 999 840 1,074
Loans to housing associations1 790 876 1,022
Local authority loans 752 737 917
Equity release mortgages 4,102 3,558 4,214
Commercial real estate loans 1,260 1,142 1,317
Income strips 910 844 886
Bridging loans to private equity funds 359 342 339
Other 1 12 9
Total Level 3 debt securities 11,656 10,809 12,452
Less amounts classified as held for sale2 (915) (852) (892)
10,741 9,957 11,560
1 At 31 December 2021 £1,632 million (30 June 2021: £1,146 million) of
private corporate credit assets have been reclassified as loans guaranteed by
export credit agencies & supranationals (31 December 2021: £60 million;
30 June 2021: £220 million), infrastructure loans (31 December 2021: £550
million; 30 June 2021: £50 million) and loans to housing associations loans
(31 December 2021: £1,022 million; 30 June 2021: £876 million).
2 The fair value hierarchy for the financial assets classified as held for
sale as at 30 June 2021 has been restated to reclassify £844 million of debt
securities from Level 1 to Level 3.
The Group holds unquoted corporate bonds with a total value of £5,024 million
(30 June 2021: £4,911 million; 31 December 2021: £5,687 million). These
unquoted corporate bonds are secured on various assets and are valued using a
discounted cash flow model. The discount rate is made up of a risk-free rate
and a spread. The risk-free rate is taken from an appropriate gilt of
comparable duration. The spread is taken from a basket of comparable
securities. The valuations are sensitive to movements in this spread. An
increase of 65bps would decrease the value by £368 million (30 June 2021:
£387 million; 31 December 2021: £468 million) and a decrease of 65bps would
increase the value by £403 million (30 June 2021: £419 million; 31 December
2021: £513 million).
Included within debt securities are investments in equity release mortgages
with a value of £4,102 million (30 June 2021: £3,558 million; 31 December
2021: £4,214 million). The loans are valued using a discounted cash flow
model and a Black-Scholes model for valuation of the No-Negative Equity
Guarantee ('NNEG'). The NNEG caps the loan repayment in the event of death or
entry into long-term care to be no greater than the sales proceeds from the
property.
The future cash flows are estimated based on assumed levels of mortality
derived from published mortality tables, entry into long-term care rates and
voluntary redemption rates. Cash flows include an allowance for the expected
cost of providing a NNEG assessed under a real world approach using a closed
form model including an assumed level of property value volatility. For the
NNEG assessment, property values are indexed from the latest property
valuation point and then assumed to grow in line with an RPI based assumption.
Cash flows are discounted using a risk-free curve plus a spread, where the
spread is based on recent originations, with margins to allow for the
different risk profiles of ERM loans.
Considering the fair valuation uses certain inputs that are not market
observable, the fair value measurement of these loans has been categorised as
a Level 3 fair value. The key non-market observable input is the voluntary
redemption rate, for which the assumption varies by the origin, age and loan
to value ratio of each portfolio. Experience analysis is used to inform this
assumption; however, where experience is limited for more recently originated
loans, significant expert judgement is required.
The significant sensitivities arise from movements in the yield curve,
inflation rate, house prices and the voluntary redemption rate. An increase of
100bps in the yield curve would decrease the value by £386 million (30 June
2021: £355 million; 31 December 2021: £443 million) and a decrease of 100bps
would increase the value by £441 million (30 June 2021: £405 million; 31
December 2021: £512 million). An increase of 1% in the inflation rate would
increase the value by £11 million (30 June 2021: £21 million; 31 December
2021: £26 million) and a decrease of 1% would decrease the value by £23
million (30 June 2021: £37 million; 31 December 2021: £43 million).
An increase of 10% in house prices would increase the value by £14 million
(30 June 2021: £11 million; 31 December 2021: £13 million) and a decrease of
10% would decrease the value by £24 million (30 June 2021: £22 million; 31
December 2021: £23 million). An increase of 5% in mortality would decrease
the value by £2 million (30 June 2021: £8 million; 31 December 2021: £10
million) and a decrease of 5% in mortality would increase the value by £3
million (30 June 2021: £4 million; 31 December 2021: £9 million). An
increase of 15% in the voluntary redemption rate would decrease the value by
£11 million (30 June 2021: £14 million; 31 December 2021: £22 million) and
a decrease of 15%
in the voluntary redemption rate would increase the value by £13 million (30
June 2021: £11 million; 31 December 2021: £23 million).
The Group also holds investments in commercial real estate loans with a value
of £1,260 million (30 June 2021: £1,142 million; 31 December 2021: £1,317
million). The loans are valued using a model which discounts the expected
projected future cash flows at the risk-free rate plus a spread derived from a
basket of comparable securities. The valuation is sensitive to changes in the
discount rate. An increase of 65bps in the discount rate would decrease the
value by £24 million (30 June 2021: £19 million; 31 December 2021: £24
million) and a decrease of 65bps would increase the value by £25 million (30
June 2021: £22 million; 31 December 2021: £24 million).
Also included within debt securities are income strips with a value of £910
million (30 June 2021: £844 million; 31 December 2021: £886 million). Income
strips are transactions where an owner-occupier of a property has sold a
freehold or long leasehold interest to the Group, and has signed a long lease
(typically 30-45 years) or a ground lease (typically 45-175 years) and retains
the right to repurchase the property at the end of the lease for a nominal sum
(usually £1). The income strips are valued using an income capitalisation
approach, where the annual rental income is capitalised using an appropriate
yield. The yield is determined by considering recent transactions involving
similar income strips. The valuation is sensitive to movements in yield. An
increase of 35bps would decrease the value by £86 million (30 June 2021:
£88 million; 31 December 2021: £94 million) and a decrease of 35bps would
increase the value by £113 million (30 June 2021: £114 million; 31 December
2021: £121 million).
Borrowings
Included within borrowings measured at fair value and categorised as Level 3
financial liabilities are property reversion loans with a value of £64
million (30 June 2021: £74 million; 31 December 2021: £70 million), measured
using an internally developed model. The valuation is sensitive to key
assumptions of the discount rate. An increase in the discount rate of 1% would
decrease the value by £1 million (30 June 2021: £1 million; 31 December
2021: £1 million) and a decrease of 1% would increase the value by £1
million (30 June 2021: £1 million;
31 December 2021: £1 million).
Derivatives
Included within derivative assets and derivative liabilities are longevity
swap contracts with corporate pension schemes with a fair value of £185
million (30 June 2021: £228 million; 31 December 2021: £230 million) and
£46 million (30 June 2021: £43 million; 31 December 2021: £49 million)
respectively. These derivatives are valued on a discounted cash flow basis,
key inputs to which are the EIOPA interest rate swap curve and RPI and CPI
inflation rates.
An increase of 100bps in the swap curve would decrease the net value by £25
million (30 June 2021: £36million; 31 December 2021: £28 million) and a
decrease of 100bps would increase the net value by £39 million (30 June 2021:
£48 million; 31 December 2021: £35 million). An increase of 1% in the RPI
and CPI inflation rates would increase the value by £5 million (30 June 2021:
£18 million; 31 December 2021: £8 million) and a decrease of 1% would
decrease the value by £9 million (30 June 2021: £29 million; 31 December
2021: £8 million).
Included within derivative assets and liabilities are forward local authority
loans, forward private corporate credit, forward housing association loans and
forward infrastructure loans with a fair value of £1 million (30 June 2021:
£12 million; 31 December 2021: £7 million) and £109 million (30 June 2021:
£3 million; 31 December 2021: £9 million) respectively. These investments
include a commitment to acquire or provide funding for fixed rate debt
instruments at specified future dates. These investments are valued using a
discounted cash flow model that takes a comparable UK Treasury stock and
applies a credit spread to reflect reduced liquidity.
The credit spreads are derived from a basket of comparable securities. The
valuations are sensitive to movements in this spread. An increase of 65bps
would decrease the value by £41 million (30 June 2021: £25 million; 31
December 2021: £30 million) and a decrease of 65bps would increase the value
by £46 million (30 June 2021: £28 million; 31 December 2021: £31 million).
Also included within derivative liabilities is the Equity Release Income Plan
('ERIP') total return swap with a value of £69 million (30 June 2021: £69
million; 31 December 2021: £67 million), under which a share of the disposal
proceeds arising on a portfolio of property reversions is payable to a third
party. The carrying value of the financial liability is the discounted present
value of all future property sales that will be passed to the counterparty as
part of the swap arrangement. The valuation is sensitive to the discount rate
applied. An increase of 1% in the discount rate would decrease the value by
£2 million (30 June 2021: £2 million; 31 December 2021: £2 million) and a
decrease of 1% in the discount rate would increase the value by £2 million
(30 June 2021: £2 million; 31 December 2021: £2 million).
14.2.4 Transfers of financial instruments between Level 1 and Level 2
At 30 June 2022
From Level 1 to Level 2 From Level 2 to Level 1
£m
£m
Financial assets measured at fair value
Financial assets designated at FVTPL upon initial recognition:
Equities 4 4
Collective investment schemes 88 -
Debt securities 629 3,009
At 30 June 2021
From Level 1 to Level 2 From Level 2 to Level 1
£m
£m
Financial assets measured at fair value
Financial assets designated at FVTPL upon initial recognition:
Debt securities 3,003 1,160
At 31 December 2021
From Level 1 to Level 2 From Level 2 to Level 1
£m
£m
Financial assets measured at fair value
Derivatives 51 -
Financial assets designated at FVTPL upon initial recognition:
Equities 33 17
Debt securities 1,742 1,006
Collective investment schemes 32 42
Consistent with the prior year, all the Group's Level 1 and Level 2 assets
have been valued using standard market pricing sources.
The application of the Group's fair value hierarchy classification methodology
at an individual security level, in particular observations with regard to
measures of market depth and bid-ask spreads for debt securities resulted in
assets being moved from Level 2 to Level 1, and from Level 1 to Level 2.
14.2.5 Movement in Level 3 financial instruments measured at fair value
30 June 2022
At 1 January 2022 Net (losses)/gains in income statement Effect of purchases Sales Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 30 June Unrealised (losses)/gains on assets held at end of period
£m
£m
£m
£m
£m
£m
£m
2022(1)
£m
Financial assets
Derivatives 237 (51) - - - - 186 (51)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,899 182 203 (252) - (38) 1,994 75
Debt securities 12,452 (1,925) 1,833 (723) 25 (6) 11,656 (1,916)
Collective investment schemes 286 10 126 (1) - - 421 11
14,637 (1,733) 2,162 (976) 25 (44) 14,071 (1,830)
Total financial assets 14,874 (1,784) 2,162 (976) 25 (44) 14,257 (1,881)
1 Total financial assets of £14,257 million includes £915 million of
assets classified as held for sale.
At 1 January 2022 Net losses in income statement Effect of purchases Sales/ Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 30 June Unrealised losses on liabilities held at end period
£m
£m
£m
repayments
£m
£m
£m
£m 2022
£m
Financial liabilities
Derivatives 125 104 - (5) - - 224 102
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 70 - - (6) - - 64 -
Total financial liabilities 195 104 - (11) - - 288 102
Gains and losses on Level 3 financial instruments are included in net
investment income in the condensed consolidated income statement. There were
no gains or losses recognised in other comprehensive income in either the
current or comparative periods.
30 June 2021
At 1 January 2021 Net (losses)/gains in income statement Effect of purchases Sales Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 30 June Unrealised (losses)/gains on assets held at end of period
£m
£m
£m
£m
£m
£m
£m
20211
£m
Financial assets
Derivatives 198 (71) 113 - - - 240 (79)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,563 184 103 (162) - (2) 1,686 132
Debt securities 10,164 (261) 2,244 (1,357) 28 (9) 10,809 (362)
Collective investment schemes 401 (35) 16 (68) - - 314 45
12,128 (112) 2,363 (1,587) 28 (11) 12,809 (185)
Total financial assets 12,326 (183) 2,476 (1,587) 28 (11) 13,049 (264)
1 Total financial assets of £13,049 million includes £852 million of
assets classified as held for sale. The fair value hierarchy for the financial
assets classified as held for sale as at 30 June 2021 has been restated to
reclassify £844 million of debt securities from Level 1 to Level 3.
At 1 January 2021 Net (gains)/losses in income statement Effect of purchases Sales/ Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 30 June 2021 Unrealised (gains)/losses on liabilities held at end of period
£m
£m
£m
repayments
£m
£m
£m
£m
£m
Financial liabilities
Derivatives 162 (37) - (10) - - 115 (42)
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 84 (1) - (9) - - 74 (1)
Total financial liabilities 246 (38) - (19) - - 189 (43)
31 December 2021
At 1 January 2021 Net (losses)/gains in income statement Effect of acquisitions/ Sales Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 31 December 20211 Unrealised (losses)/gains on assets held at end of period
£m
£m
purchases
£m
£m
£m
£m
£m
£m
Financial assets
Derivatives 198 (74) 113 - - - 237 (82)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,563 436 269 (368) - (1) 1,899 278
Debt securities 10,164 88 6,394 (4,210) 26 (10) 12,452 115
Collective investment schemes 401 (70) 34 (94) 15 - 286 22
12,128 454 6,697 (4,672) 41 (11) 14,637 415
Total financial assets 12,326 380 6,810 (4,672) 41 (11) 14,874 333
1 Total financial assets of £14,874 million includes £892 million of
assets classified as held for sale.
At 1 January 2021 Net (gains)/ losses in income statement Effect of acquisitions/ Sales/ Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 31 December 2021 Unrealised (gains)/ losses on liabilities held at end of period
£m
£m
purchases
repayments
£m
£m
£m
£m
£m
Financial liabilities
Derivatives 162 (19) - (18) - - 125 (29)
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 84 4 - (18) - - 70 5
Total financial liabilities 246 (15) - (36) - - 195 (24)
15. Cash flows from operating activities
The following analysis gives further detail behind the 'cash
(utilised)/generated by operations' figure in the condensed statement of
consolidated cash flows.
Half year ended 30 June 2022 Half year ended 30 June 2021 Year ended
£m
£m
31 December 2021
£m
Loss for the period before tax (1,650) (454) (430)
Non-cash movements in profit for the period before tax
Gain on completion of abrdn plc transaction - (110) (110)
Loss on disposal of Ark Life, excluding transaction costs - - 17
Fair value (gains)/losses on:
Investment property (482) (371) (1,195)
Financial assets and derivative liabilities 36,021 (3,960) (9,436)
Change in fair value of borrowings 154 (35) (9)
Amortisation and impairment of intangible assets 261 303 644
Change in unallocated surplus (177) (79) (106)
Share-based payment charge 8 6 14
Finance costs 116 123 242
Net interest expense on Group defined benefit pension scheme liability/asset 27 16 37
Other costs of pension schemes 3 3 6
Decrease in investment assets 4,829 4,907 6,738
Decrease/(increase) in reinsurance assets 2,004 742 (227)
Decrease in assets classified as held for sale 949 - 286
(Decrease)/increase in insurance contract and investment contract liabilities (34,768) 500 6,354
Decrease in deposits received from reinsurers (580) (315) (521)
Decrease in obligation for repayment of collateral received (1,799) (1,722) (1,762)
Decrease in liabilities classified as held for sale (1,254) - (264)
Net increase in working capital (1,529) (801) (1,100)
Other items:
Contributions to defined benefit pension schemes (5) (5) (49)
Cash generated/(utilised) by operations 2,128 (1,252) (871)
16. Related party transactions
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership (see note 2.1 for
further details). This included the dissolution of the Client Service and
Proposition Agreement entered into between the two groups following the
acquisition of the Standard Life businesses in 2018. Following the completion
of this transaction, it was assessed that abrdn plc no longer had significant
influence over the Group and as a result was no longer considered a related
party from the date of the new agreement.
In 2021, in the period during which abrdn plc was a related party, investment
management fees of £20 million and other fees of £4 million were payable by
the Group to abrdn plc. Balances outstanding as at the date abrdn plc ceased
to be a related party of the Group were settled prior to 30 June 2021.
The related party transactions with abrdn plc were the only related party
transactions considered to have a material effect on either the results or
financial position of the Group.
17. Contingent liabilities
In the normal course of business, the Group is exposed to certain legal
issues, which can involve litigation and arbitration. At the period end, the
Group has a number of contingent liabilities in this regard, none of which are
considered by the Directors to be material.
18. Events after the reporting period
On 20 July 2022, the Group redeemed its £450 million Tier 3 subordinated
notes in full at their principal amount, together with interest accrued to the
repayment date.
On 4 August 2022, the Company announced the proposed acquisition of the entire
issued share capital of SLF of Canada UK Limited from the Sun Life Assurance
Company of Canada. The acquisition was approved by the Board prior to
announcement and remains subject to regulatory approval. Total cash
consideration of £248 million is payable to the Sun Life Assurance Company of
Canada upon completion, subject to certain adjustments.
On 12 August 2022, the Board declared an interim dividend per share of 24.8p
for the half year ended 30 June 2022 (half year ended 30 June 2021: 24.1p;
year ended 31 December 2021: 24.8p). The cost of this dividend has not been
recognised as a liability in the interim financial statements for the half
year ended 30 June 2022 and will be charged to the statement of consolidated
changes in equity when paid.
Additional life company asset disclosures
The analysis of the asset portfolio provided below comprises the assets held
by the Group's life companies, and it is stated net of derivative liabilities.
It excludes other Group assets such as cash held in the holding and management
service companies and the assets held by the non-controlling interest in
consolidated collective investment schemes. The information is presented on a
look-through basis into the underlying funds.
The following table provides an overview of the exposure by asset category of
the Group's life companies' shareholder and policyholder funds:
30 June 2022
Carrying value Shareholder and Participating Participating non- Unit-linked2 Total
£m
non-profit funds1 supported1 supported2 £m
£m £m £m
Cash and cash equivalents 4,396 1,349 6,786 8,989 21,520
Debt securities - gilts and foreign government bonds 5,345 270 16,414 12,057 34,086
Debt securities - other government and 2,046 274 1,867 3,001 7,188
supranationals
Debt securities - infrastructure loans - project finance3 899 - - - 899
Debt securities - infrastructure loans - corporate4 1,034 - 1 - 1,035
Debt securities - local authority loans5 823 - 8 5 836
Debt securities - loans guaranteed by export credit agencies and 467 - - - 467
supranationals6
Debt securities - private corporate credit7 1,638 - 142 14 1,794
Debt securities - loans to housing associations8 882 - 8 3 893
Debt securities - commercial real estate loans9 1,260 - - - 1,260
Debt securities - equity release mortgages9 4,102 - - - 4,102
Debt securities - other debt securities 15,298 1,248 13,835 23,330 53,711
33,794 1,792 32,275 38,410 106,271
Equity securities 107 51 17,240 103,091 120,489
Property investments 70 24 2,214 7,793 10,101
Income strips9 - - - 910 910
Other investments10 (791) (160) 1,270 8,986 9,305
Total Life Company assets 37,576 3,056 59,785 168,179 268,596
Less assets held by disposal groups11 - - - (10,428) (10,428)
At 30 June 2022 37,576 3,056 59,785 157,751 258,168
Cash and cash equivalents in Group holding companies 1,226
Cash and financial assets in other Group companies 1,088
Financial assets held by the non-controlling interest in consolidated 4,882
collective investment schemes
Financial assets in consolidated funds held by disposal groups11 1,502
Total Group consolidated assets excluding amounts classified as held for sale 266,866
Comprised of:
Investment property 5,082
Financial assets 255,135
Cash and cash equivalents 10,738
Derivative liabilities (4,089)
266,866
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 Total infrastructure loans - project finance of £899 million include
£850 million classified as Level 3 debt securities in the fair value
hierarchy.
4 Total infrastructure loans - corporate of £1,035 million include
£999 million classified as Level 3 debt securities in the fair value
hierarchy.
5 Total local authority loans of £836 million include £752 million
classified as Level 3 debt securities in the fair value hierarchy.
6 Total loans guaranteed by export credit agencies and supranationals of
£467 million include £348 million classified as Level 3 debt securities in
the fair value hierarchy.
7 Total private corporate credit of £1,794 million include £1,285
million classified as Level 3 debt securities in the fair value hierarchy.
8 Total loans to housing associations of £893 million include £790
million classified as Level 3 debt securities in the fair value hierarchy.
9 All commercial real estate loans, equity release mortgages and income
strips are classified as Level 3 debt securities in the fair value hierarchy.
10 Includes policy loans of £11 million, other loans of £254 million, net
derivative liabilities of £(763) million, reinsurers' share of investment
contracts of £9,120 million and other investments of £683 million.
11 See note 2 to the consolidated interim financial statements for further
details.
31 December 2021 Shareholder and Participating Participating non- Unit-linked2 Total
£m
Carrying value non-profit funds1 supported1 supported2 £m
£m £m £m
Cash and cash equivalents 5,437 1,644 7,103 9,691 23,875
Debt securities - gilts and foreign government bonds 8,687 311 20,623 14,170 43,791
Debt securities - other government and supranationals 2,381 318 2,088 3,051 7,838
Debt securities - infrastructure loans - project finance3,4 1,026 - 1 - 1,027
Debt securities - infrastructure loans - corporate3,5 1,118 - - - 1,118
Debt securities - local authority loans and US municipal bonds3,6 1,140 - 10 6 1,156
Debt securities - loans guaranteed by export credit agencies and 373 - - - 373
supranationals3,7
Debt securities - private corporate credit3,8 1,928 1 169 27 2,125
Debt securities - loans to housing associations3,9 1,161 - 9 3 1,173
Debt securities - commercial real estate loans3,10 1,317 - - - 1,317
Debt securities - equity release mortgages3,10 4,214 - - - 4,214
Debt securities - other debt securities 16,713 1,432 16,274 28,218 62,637
40,058 2,062 39,174 45,475 126,769
Equity securities 122 61 20,386 113,779 134,348
Property investments 76 26 2,248 7,906 10,256
Income strips3,10 - - - 886 886
Other investments11 623 341 3,098 10,119 14,181
Total Life Company assets 46,316 4,134 72,009 187,856 310,315
Less assets held by disposal groups12 - - - (11,676) (11,676)
At 31 December 2021 46,316 4,134 72,009 176,180 298,639
Cash and cash equivalents in Group holding companies 964
Cash and financial assets in other Group companies 793
Financial assets held by the non-controlling interest in consolidated 4,155
collective investment schemes
Financial assets in consolidated funds held by disposal groups12 1,788
Total Group consolidated assets excluding amounts classified as held for sale 306,339
Comprised of:
Investment property 5,283
Financial assets 293,192
Cash and cash equivalents 9,112
Derivative liabilities (1,248)
306,339
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 The illiquid asset classes have been represented to align with those
used in the Group's Internal Model.
4 Total infrastructure loans - project finance of £1,027 million
include £967 million classified as Level 3 debt securities in the fair value
hierarchy.
5 Total infrastructure loans - corporate of £1,118 million include
£1,074 million classified as Level 3 debt securities in the fair value
hierarchy.
6 Total local authority loans and US municipal bonds of £1,156 million
include £919 million classified as Level 3 debt securities in the fair value
hierarchy.
7 Total loans guaranteed by export credit agencies and supranationals of
£373 million include £219 million classified as Level 3 debt securities in
the fair value hierarchy.
8 Total private corporate credit of £2,125 million include £1,485
million classified as Level 3 debt securities in the fair value hierarchy.
9 Total loans to housing associations of £1,173 million include £1,022
million classified as Level 3 debt securities in the fair value hierarchy.
10 All commercial real estate loans, equity release mortgages and income
strips are classified as Level 3 debt securities in the fair value hierarchy.
11 Includes policy loans of £11 million, other loans of £248 million, net
derivative assets of £3,309 million, reinsurers' share of investment
contracts of £10,009 million and other investments of £604 million.
12 See note 2 to the consolidated interim financial statements for further
details.
The following table provides a reconciliation of the total life company assets
to Assets Under Administration ('AUA') as detailed in the Business Review on
page 14.
At 30 June At 31 December 2021
2022
£bn
£bn
Total Life Company assets excluding amounts classified as held for sale 258.2 298.6
Off-balance sheet AUA1 10.6 11.8
Assets Under Administration 268.8 310.4
1 Off-balance sheet AUA represents assets held in respect of certain
Group Self-Invested Personal Pension products where the beneficial ownership
interest resides with the customer (and which are therefore not recognised in
the condensed statement of consolidated financial position) but on which the
Group earns fee revenue.
All of the life companies' debt securities are held at fair value through
profit or loss in accordance with IAS 39 Financial Instruments: Recognition
and Measurement, and therefore already reflect any reduction in value between
the date of purchase and the reporting 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.
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. As part of the Group's risk appetite
framework and analysis of shareholder exposure to a potential worsening of the
economic situation, this assessment has been used to identify counterparties
considered to be most at risk from defaults. The financial impact on these
counterparties, and the contagion impact on the rest of the shareholder
portfolio, is assessed under various scenarios and assumptions. This analysis
is regularly reviewed to reflect the latest economic 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 table below shows the Group's market exposure analysed by credit rating
for the shareholder debt portfolio, which comprises of debt securities held in
the shareholder and non-profit funds:
Sector analysis of shareholder bond portfolio AAA AA A BBB BB & below1 Total
£m
£m
£m
£m
£m
£m
Industrials - 303 318 611 - 1,232
Basic materials - 1 150 19 - 170
Consumer, cyclical - 375 432 276 141 1,224
Technology and telecoms 186 367 571 743 7 1,874
Consumer, non-cyclical 254 372 1,081 342 12 2,061
Structured finance - - 48 - - 48
Banks2 514 537 2,510 448 16 4,025
Financial services 99 299 204 127 8 737
Diversified - 5 28 - - 33
Utilities 22 121 832 1,326 - 2,301
Sovereign, sub-sovereign and supranationals3 1,144 6,505 638 130 9 8,426
Real estate 24 141 2,786 970 112 4,033
Investment companies 23 136 6 2 - 167
Insurance 19 400 337 70 8 834
Oil and gas - 141 372 42 - 555
Collateralised debt obligations - 7 - - - 7
Private equity loans - - 8 24 - 32
Infrastructure loans - 16 236 1,469 212 1,933
Equity release mortgages4 2,093 1,040 945 - 24 4,102
At 30 June 2022 4,378 10,766 11,502 6,599 549 33,794
1 Includes unrated holdings of £80 million.
2 The £4,025 million total shareholder exposure to bank debt comprised
£3,340 million senior debt and £685 million subordinated debt.
3 Includes £823 million reported as local authority loans, £57 million
reported as private corporate credit and £155 million reported as loans
guaranteed by export credit agencies and supranationals in the summary table
on page 62.
4 The credit ratings attributed to equity release mortgages are based on
the ratings assigned to the internal securitised loan notes.
Sector analysis of shareholder bond portfolio 5 AAA AA A BBB BB & below1 Total
£m
£m
£m
£m
£m
£m
Industrials - 165 329 820 6 1,320
Basic materials - 1 166 29 - 196
Consumer, cyclical 11 438 461 302 148 1,360
Technology and telecoms 165 268 592 735 3 1,763
Consumer, non-cyclical 258 271 966 338 - 1,833
Structured finance - - 52 - - 52
Banks2 662 769 2,750 578 19 4,778
Financial services 51 281 382 147 5 866
Diversified - 6 28 - - 34
Utilities 25 121 1,304 1,272 2 2,724
Sovereign, sub-sovereign and supranational3 1,465 9,983 827 109 - 12,384
Real estate 27 183 3,364 757 254 4,585
Investment companies 30 200 2 - - 232
Insurance 16 428 426 38 22 930
Oil and gas - 147 381 81 - 609
Collateralised debt obligations - 8 - - - 8
Private equity loans - - - 26 - 26
Infrastructure loans - 84 236 1,620 204 2,144
Equity release mortgages4 2,085 1,144 963 - 22 4,214
At 31 December 2021 4,795 14,497 13,229 6,852 685 40,058
1 Includes unrated holdings of £113
million.
2 The £4,778 million total shareholder exposure to bank debt comprised
£3,732 million senior debt and £1,046 million subordinated debt.
3 Includes £1,069 million reported as local authority loans & US
municipal bonds, £42 million reported as private corporate credit and £205
million reported as loans guaranteed by export credit agencies and
supranationals in the summary table on page 63.
4 The credit ratings attributed to equity release mortgages are based on
the ratings assigned to the internal securitised loan notes.
5 The illiquid asset classes have been represented to align with those
used in the Group's Internal Model.
Additional capital disclosures
PGH PLC Solvency II Surplus
The estimated PGH plc surplus at 30 June 2022 is £4.7 billion (31 December
2021: £5.3 billion).
30 June 2022 31 December 2021
Estimated
£bn
£bn
Own Funds 12.4 14.8
SCR (7.7) (9.5)
Surplus 4.7 5.3
The Eligible Own Funds reflects a dynamic recalculation of TMTP. Had this not
been performed, the surplus would have been £0.4 billion higher.
Composition of own funds
Own Funds items are classified into different Tiers based on the features of
the specific items and the extent to which they possess the following
characteristics, with Tier 1 being the highest quality:
· availability to be called up on demand to fully absorb losses on a
going-concern basis, as well as in the case of winding-up ('permanent
availability'); and
· in the case of winding-up, the total amount that is available to absorb
losses before repayment to the holder until all obligations to policyholders
and other beneficiaries have been met ('subordination').
PGH plc's total Own Funds are analysed by Tier as follows:
30 June 2022 31 December 2021
Estimated
£bn
£bn
Tier 1 - Unrestricted 8.1 9.9
Tier 1 - Restricted 1.1 1.1
Tier 2 2.8 2.9
Tier 3 0.4 0.9
Total Own Funds 12.4 14.8
PGH plc's unrestricted Tier 1 capital accounts for 65% (31 December 2021: 67%)
of total Own Funds and comprises ordinary share capital, surplus funds of the
unsupported with-profit funds which are recognised only to a maximum of the
SCR, and the accumulated profits of the remaining business.
Restricted Tier 1 capital comprises the contingent convertible Tier 1 Notes
issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of
which enable the notes to qualify as restricted Tier 1 capital for regulatory
reporting purposes.
Tier 2 capital is comprised of subordinated notes whose terms enable them to
qualify as Tier 2 capital for regulatory reporting purposes.
Tier 3 items include the Tier 3 subordinated notes of £0.2 billion (31
December 2021: £0.7 billion) and the deferred tax asset of £0.2 billion (31
December 2021: £0.2 billion).
Breakdown of SCR
The Group operates one single harmonised PRA approved Internal Model covering
all the Group entities, with the exception of the Irish entity, Standard Life
International Designated Activity Company ('SLIDAC') and the acquired ReAssure
businesses. SLIDAC and the ReAssure businesses calculate their capital
requirements in accordance with the Standard Formula. An analysis of the
pre-diversified SCR of PGH plc is presented below:
30 June 2022 Estimated 31 December 2021
Harmonised ReAssure and SLIDAC Harmonised Internal Model ReAssure and SLIDAC
Internal Model
Standard Formula
%
Standard Formula
%
%
%
Longevity 16 19 22 21
Credit 18 21 18 21
Persistency 20 24 20 22
Interest rates 10 8 9 8
Operational 7 4 6 3
Swap spreads 1 - 3 -
Property 4 1 4 1
Other market risks 13 12 12 14
Other non-market risks 11 11 6 10
Total pre-diversified SCR 100 100 100 100
Minimum capital requirements
Under the Solvency II regulations, the Minimum Capital Requirement ('MCR') is
the minimum amount of capital an insurer is required to hold below which
policyholders and beneficiaries would become exposed to an unacceptable level
of risk if an insurer was allowed to continue its operations. For Groups this
is referred to as the Minimum Consolidated Group SCR ('MGSCR').
The MCR is calculated according to a formula prescribed by the Solvency II
regulations and is subject to a floor of 25% of the SCR or €3.7 million,
whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on
factors applied to technical provisions and capital at risk. The MGSCR
represents the sum of the MCRs of the underlying insurance companies.
The Eligible Own Funds to cover the MGSCR is subject to quantitative limits as
shown below:
· the Eligible amounts of Tier 1 items should be at least 80% of the MGSCR;
and
· the Eligible amounts of Tier 2 items shall not exceed 20% of the MGSCR.
PGH plc's MGSCR at 30 June 2022 is £2.4 billion (31 December 2021: £3.0
billion).
PGH plc's Eligible Own Funds to cover the MGSCR is £9.8 billion (31 December
2021: £11.5 billion) leaving an excess of Eligible Own Funds over MGSCR of
£7.4 billion (31 December 2021: £8.5 billion), which transfers to an MGSCR
coverage ratio of 406% (31 December 2021: 387%).
Alternative performance measures
The Group assesses its financial performance based on a number of measures.
Some measures are management derived measures of historic or future financial
performance, position or cash flows of the Group; which are not defined or
specified in accordance with relevant financial reporting frameworks such as
International Financial Reporting Standards ('IFRS') or Solvency II.
These measures are known as Alternative Performance Measures ('APMs').
APMs are disclosed to provide stakeholders with further helpful information on
the performance of the Group and should be viewed as complementary to, rather
than a substitute for, the measures determined according to IFRS and Solvency
II requirements. Accordingly, these APMs may not be comparable with similarly
titled measures and disclosures by other companies.
A list of the APMs used in our results as well as their definitions, why they
are used and, if applicable, how they can be reconciled to the nearest
equivalent GAAP measure is provided below. Further discussion of these
measures can be found in the business review from page 6.
APM Definition Why this measure is used Reconciliation to financial statements
Assets under administration The Group's Assets under Administration ('AUA') represents assets administered AUA indicates the potential earnings capability of the Group arising from its A reconciliation from the Group's IFRS statement of consolidated financial
by or on behalf of the Group, covering both policyholder fund and shareholder insurance and investment business. AUA flows provide a measure of the Group's position to the Group's AUA is provided on page 14.
assets. It includes assets recognised in the Group's IFRS statement of ability to deliver new business growth.
consolidated financial position together with certain assets administered by
the Group for which beneficial ownership resides with customers.
Fitch The Fitch leverage ratio is calculated by Phoenix (using Fitch Ratings' stated The Group seeks to manage the level of debt on its balance sheet by monitoring The debt and equity figures are directly sourced from the Group's IFRS
leverage ratio methodology) as debt as a percentage of the sum of debt and equity. Debt is its financial leverage ratio. This is to ensure the Group maintains its statement of consolidated financial position on pages 31 and 32 and the
defined as the IFRS carrying value of shareholder borrowings. Equity is investment grade credit rating as issued by Fitch Ratings and optimises its analysis of borrowings note on page 52.
defined as the sum of equity attributable to the owners of the parent, funding costs and financial flexibility for future acquisitions.
non-controlling interests, the unallocated surplus and the Tier 1 Notes.
Incremental Incremental long-term cash generation represents the operating companies' cash This measure provides an indication of the Group's performance in delivering Incremental long-term cash generation is not directly reconcilable to the
long-term cash generation generation that is expected to arise in future years as a result of new new business growth to offset the impact of run-off of the Group's Heritage financial statements as it relates to cash generation expected to arise in the
business transacted in the current period within the Group's UK Open and business and to bring sustainability to future cash generation. future.
Europe segments. It excludes any costs associated with the acquisition of the
new business.
Life Company The Solvency II surplus of the Life Companies that is in excess of their Board This figure provides a view of the level of surplus capital in the Life Please see business review section on page 12 for further analysis of the
Free Surplus approved capital according to their capital management policies. Companies that is available for distribution to the holding companies, and the solvency positions of the
generation of Free Surplus underpins future operating cash generation.
Life Companies.
Long-term Free Cash ('LTFC') Long-term Free Cash ('LTFC') is comprised of long-term cash to emerge from LTFC provides a measure of the Group's total long-term cash available for The metric is not directly reconcilable to the financial statements as it
in-force business, plus holding company cash, less an allowance for costs operating costs, interest, growth and shareholder returns. Increases in LTFC includes a significant component relating to cash that is expected to emerge
associated with in-flight mergers and acquisitions and the related transition will be driven by sources of long-term cash i.e. new business and in the future. Holding company cash included within LTFC is consistent with
activities, and a deduction for shareholder debt outstanding. over-delivery of management actions. Decreases in LTFC will reflect the uses the holding company cash and cash equivalents as disclosed in the cash section
of cash at holding company level, including expenses, interest, investment in of the business review. Shareholder debt outstanding reflects the face value
BPA and dividends. of the shareholder borrowings disclosed on page 52.
New business contribution Represents the increase in Solvency II shareholder Own funds arising from new This measure provides an assessment of the day one value arising on the New business contribution is not directly reconcilable to the Group's Solvency
business written in the year, adjusted to exclude the associated risk margin writing of new business in the UK Open and Europe segments, and is stated II metrics as it represents an in-year movement.
and any restrictions in respect of contract boundaries and stated on a net of after applicable taxation and acquisition costs.
tax basis.
Operating Cash remitted by the Group's operating companies to the Group's holding The statement of consolidated cash flows prepared in accordance with IFRS Operating companies' cash generation is not directly reconcilable to an
companies' companies. combines cash flows relating to shareholders with cash flows relating to equivalent GAAP measure (IFRS statement of consolidated cash flows) as it
cash generation policyholders, but the practical management of cash within the Group maintains includes amounts that eliminate on consolidation.
a distinction between the two. The Group therefore focuses on the cash flows
of the holding companies which relate only to shareholders. Such cash flows Further details of holding companies' cash flows are included within the
are considered more representative of the cash generation that could business review on pages 7 to 9, and a breakdown of the Group's cash position
potentially be distributed as dividends or used for debt repayment and by type of entity is provided in the additional life company asset disclosures
servicing, Group expenses and pension contributions. section on page 62.
Operating companies' cash generation is a key performance indicator used by
management for planning, reporting and executive remuneration.
Operating profit Operating profit is a financial performance measure based on expected This measure provides a more representative view of the Group's performance A reconciliation of operating profit to the IFRS result before tax
long-term investment returns. It is stated before tax and non-operating items than the IFRS result after tax as it provides long-term performance attributable to owners is included in the business review on page 15.
including amortisation and impairments of intangibles, finance costs information unaffected by short-term economic volatility and one-off items,
attributable to owners and other non-operating items which in the Director's and is stated net of policyholder finance charges and tax.
view should be excluded by their nature or incidence to enable a full
understanding of financial performance. It helps give stakeholders a better understanding of the underlying
performance of the Group by identifying and analysing non-operating items.
Further details of the components of this measure and the assumptions inherent
in the calculation of the long-term investment return are included in note 4.1
in the interim financial statements.
Shareholder Represents total Eligible Own Funds divided by the Solvency Capital The unsupported with-profit funds and Group pension funds do not contribute to Further details of the Shareholder Capital Coverage Ratio and its calculation
Capital Requirements ('SCR'), adjusted to a shareholder view through the exclusion of the Group Solvency II surplus. However, the inclusion of related Own Funds and are included in the business
Coverage Ratio amounts relating to those ring-fenced with-profit funds and Group pension SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
review on page 10.
schemes whose Own Funds exceed their SCR. focuses on a shareholder view of the capital coverage ratio which is
considered to give a more accurate reflection of the capital strength
of the Group.
Shareholder information
Annual General Meeting
Our Annual General Meeting ('AGM') was held on 5 May 2022 at 10.00am (BST).
The voting results for our 2022 AGM, including proxy votes and votes withheld
are available on our website at www.thephoenixgroup.com
Shareholder services
Managing your shareholding
Our registrar, Computershare, maintains the Company's register of members. If
you have any queries in respect of your shareholding, please contact them
directly using the contact details set out below.
Registrar details
Computershare Investor Services PLC
The Pavilions,
Bridgwater Road,
Bristol,
BS99 6ZZ
Shareholder helpline number +44 (0) 370 702 0181
Fax number +44 (0) 370 703 6116
www.investorcentre.co.uk/contactus
Share price
You can access the current share price of Phoenix Group Holdings plc at
www.thephoenixgroup.com
Group financial calendar for 2022
2022 interim dividend
Ex-dividend date 25 August 2022
Record date 26 August 2022
Interim 2022 dividend payment date 12 September 2022
Forward-looking statements
The 2022 Interim Report contains, and the Group may make other statements
(verbal or otherwise) containing, forward looking statements and other
financial and/or statistical data 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', 'will', 'may',
'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward-looking. Such
forward-looking statements and other financial and/or statistical data 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 the Group has 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, social, environmental and business
conditions;
· asset prices;
· market-related risks such as fluctuations in interest rates and exchange
rates, the potential for a sustained low-interest rate environment, and the
performance of financial markets generally;
· the policies and actions of governmental and/or regulatory authorities,
including, for example, initiatives related to the financial crisis, the
COVID-19 pandemic, climate change and the effect of the UK's version of the
'Solvency II' requirements on the Group's capital maintenance requirements;
· the political, legal, social and economic effects of the COVID-19
pandemic and the UK's exit from the European Union;
· the direct and indirect consequences of the Russia-Ukraine War on
European and global macroeconomic conditions;
· the impact of inflation and deflation;
· information technology or data security breaches (including the Group
being subject to cyber-attacks)
· the development of standards and interpretations including evolving
practices in ESG and climate reporting with regard to the interpretation and
application of accounting;
· the limitation of climate scenario analysis and the models that analyse
them;
· lack of transparency and comparability of climate-related forward-looking
methodologies;
· climate change and a transition to a low-carbon economy (including the
risk that the Group may not achieve its targets);
· 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 proposed or future
acquisitions, disposals or combinations within relevant industries;
· risks associated with arrangements with third parties;
· inability of reinsurers to meet obligations or unavailability of
reinsurance coverage; and
· 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 and other financial and/or statistical data
within the 2022 Interim Report. No representation is made that any of these
statements will come to pass or that any future results will be achieved. As a
result, you are cautioned not to place undue reliance on such forward-looking
statements contained in this 2022 Interim Report.
The Group undertakes no obligation to update any of the forward-looking
statements or data contained within the 2022 Interim Report or any other
forward-looking statements or data it may make or publish.
The 2022 Interim Report 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 2022
Interim Report is or should be construed as a profit forecast or estimate.
Caution about climate and ESG related disclosures
Climate and ESG disclosures use a greater number and level of judgements,
assumptions and estimates, including with respect to the classification of
climate-related activities, than the Group's reporting of historical financial
information. These judgements, assumptions and estimates are highly likely to
change over time, and, when coupled with the longer timeframes used in these
disclosures, make any assessment of materiality inherently uncertain. In
addition, the Group's climate risk analysis and net zero transition planning
will continue to evolve and the data underlying the Group's analysis and
strategy remain subject to change over time. As a result, the Group expects
that certain climate and ESG disclosures made in the 2022 Interim Report are
likely to be amended, updated, recalculated or restated in the future.
Online resources
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.
Go online
www.thephoenixgroup.com
Investor relations
Our Investor Relations section includes information such as our most recent
news and announcements, results presentations, annual and interim reports,
share-price performance, AGM and EGM information, UK Regulatory Returns and
contact information.
Go online
www.thephoenixgroup.com/investor-relations
News and updates
To stay up-to-date with Phoenix Group news and other changes to our site's
content, you can sign up for e-mail alerts, which will notify you when content
is added.
Go online
www.thephoenixgroup.com/site-services/e-mail-alerts.aspx
(http://www.thephoenixgroup.com/site-services/e-mail-alerts.aspx)
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