REG - Phoenix Group Hldgs - Interim Financial Report
28/09/2023 07:00
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RNS Number : 9183N Phoenix Group Holdings PLC 28 September 2023
Phoenix Group Holdings plc: Half Year 2023 Results 28 September 2023
LEI: 2138001P49OLAEU33T68
Phoenix Group HY23 Interim Financial Report
Phoenix Group today publishes its Half Year 2023 Interim Financial Report,
which includes the Group's HY23 IFRS financial statements.
The Group previously published its 2023 Interim Results on Monday 18th
September, across its core financial metrics of cash and capital. During the
first half the Group delivered strong organic growth as it more than doubled
incremental new business long-term cash generation to £885 million, while
delivering ongoing dependable cash generation with £898 million remitted in
the period, and continued to maintain a resilient balance sheet.
The results materials and a replay of the management presentation are
available on the Group's website at:
https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations
(https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations)
As a reminder, the Group trades ex-dividend today, reflecting an Interim
dividend of 26.0 pence per share.
Overview of HY23 IFRS results
· IFRS 17 is a global accounting standard that was implemented on 1
January 2023 and is an accounting change which does not alter the underlying
economics of our business. As a result, IFRS 17 does not change our strategy
or dividend, and we will remain focused on delivering cash and capital.
· As a result of our successful track record of delivering
value-accretive M&A and subsequent integration activity, c.95% of our
business was recognised at fair value on transition, which results in the
establishment of a lower Contractual Service Margin ('CSM') and also increases
the volatility in our shareholders' equity.
· IFRS adjusted shareholders' equity (inclusive of a £2.0bn CSM net of
tax) was £4.8bn at 30 June 2023, down £0.4bn since 31 December 2022
(£5.2bn) due to a reduction in shareholders' equity. This reflects an IFRS
loss after tax attributable to shareholders for HY23 of £261 million and
payment of the Final 2022 dividend of £260 million, partly offset by positive
Other Comprehensive Income movements on the Group's currency hedges and
pension scheme liabilities.
· The Group's CSM (gross of tax) at 30 June 2023 was £2.7bn and this
grew 5% in the first six months of the year (31 December 2022: £2.6bn),
primarily due to new BPA business written and the acquisition of the Sun Life
of Canada UK business, partly offset by the release in the period. It
represents a significant store of future profits and is expected to release
into the P&L at c.5-7% per annum over time.
· Adjusted operating profit before tax under IFRS for HY23 was £266
million, which is a 5% year-on-year increase (HY22: £254 million). This
primarily reflects an increase in the CSM release from both BPA new business
and positive assumption changes relating to the prior year.
· The Group's HY23 Fitch leverage ratio remained stable at 25% (Restated
FY22: 25%), which is at the bottom of our 25-30% target range, and leverage is
therefore not a constraint to our M&A ambitions.
All page references in this document refer to the Phoenix Group Holdings plc
Interim Financial Report 2023.
Enquiries
Investors/analysts:
Claire Hawkins, Director of Corporate Affairs and 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
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, political, social, environmental and business
conditions; asset prices; market related risks such as fluctuations in
investment yields, interest rates and exchange rates, the potential for a
sustained low-interest rate or high-interest rate, environment, and the
performance of financial or credit 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" regulations on
the Group's capital maintenance requirements; the impact of changing inflation
rates (including high inflation) and/or deflation; the medium and long-term
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
European and global macroeconomic conditions of the Russia-Ukraine War and
related or other geopolitical conflicts; 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, and implementing
changes in IFRS 17 or any other regulatory solvency and/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.
Overview
Group Chief Executive Officer's report
Phoenix has made an excellent start to 2023 - we are executing on our
strategy, and this is enabling us to deliver strong growth and resilient cash
generation.
The progress we are making as a business is demonstrable, as we continue to
deliver strong financial results across our financial framework of cash,
resilience and growth, through executing on our strategic priorities.
A purpose-led business with a single strategic focus
Phoenix is the UK's largest long-term savings and retirement business and our
purpose is 'helping people secure a life of possibilities'. This is embedded
in everything that we do and informs our single strategic focus, which is to
help customers journey to and through retirement. We do this by offering a
broad range of pensions, savings and retirement income products, and the
education and advice they need, to support customers across all stages of
their savings life cycle. We are proud to manage £269 billion of customer
assets in support of this.
There is a huge societal need for what we do, as only c.10% of individuals
take advice on their journey to and through retirement, and only 1-in-7
Defined Contribution ('DC') pension savers are on track for a retirement
income that maintains their current living standards. The UK long-term savings
and retirement market is large, with c.£3 trillion of total stock, and is
growing fast, with annual flows of c.£150-200 billion.
Counterintuitively, these structural growth opportunities are only being
accelerated by the current challenging economic environment. In Workplace, we
are seeing strong growth, fuelled by high levels of salary inflation and full
employment in the UK economy. The Retail market has slowed down a bit, with
less switching of flows between providers, but this is helpful for our
in-force book as it helps us to improve our customer retention. While the BPA
market is seeing record levels of demand, due to higher interest rates, making
BPAs more affordable for corporates. Finally, we believe there will be more
M&A opportunities coming to market over time, as high inflation means that
it's harder to deliver the necessary cost reductions, in unhedged closed
books, and so the cash generation in these books will be reducing.
We have a diversified and balanced business mix, across the long-term savings
and retirement market, with around two-thirds of our business being
capital-light, fee-based products. Our strategy is designed to maintain a
balanced business mix, as we leverage our existing scale to grow our
capital-light fee-based Pensions and Savings business, and through being
disciplined in our annuity growth, as we seek to limit the credit risk we
retain on our balance sheet.
Having trusted brands is critical to engaging customers and having the
credibility to support them with some of the most important financial
decisions they make. We are therefore proud to have a family of brands that
enables us to successfully engage and support customers throughout their
savings lifecycles, helping us to grow both organically and through M&A.
In particular, our Standard Life brand is highly trusted and well known, and
is one of the key drivers of our organic growth as we utilise it to win new
business in both the Workplace and BPA markets. In total, our brands service
c.12 million customers, and they come together in our passion to deliver our
purpose.
A strong financial performance in the first six months of 2023
I am delighted with the momentum in our organic growth. We have more than
doubled new business incremental long-term cash generation to £885 million in
the first half (HY 2022: £430 million), which means we have already more than
offset the run-off or our in-force business of c.£800 million per annum in
the first half. Our new business net fund flows are growing strongly too, up
72% year-on-year to £3.1 billion (HY 2022: £1.8 billion). The strong
progress we have made with our growth strategy means that we now expect to
deliver positive Group net funds flows from 2024, for the first time in
Phoenix's history.
We have continued to deliver strong cash generation with £898 million in the
period (HY 2022: £950 million) and are on track to deliver at the top-end of
our £1.3-to-£1.4 billion target range for 2023. Our balance sheet also
remains resilient with a Solvency II ('SII') surplus of £3.9 billion (FY
2022: £4.4 billion) and Shareholder Capital Coverage Ratio of 180% (FY 2022:
189%). This resilience provides the flexibility to not only invest our surplus
capital into growth opportunities, but ensures our dividend is sustainable
over the very long term.
Reflecting our strong business performance, the Board has declared an Interim
dividend of 26.0p per share, equal to the 2022 Final dividend, which is a 5%
increase year-on-year (HY 2022: 24.8p).
Finally, as a reminder, our Half Year 2023 results are our first reported under the new IFRS 17 accounting standard, following its implementation on 1 January 2023. Under IFRS 17 total profit remains unchanged over the lifetime of a contract, however the timing of when profit emerges is different. The impact of the transition is covered in more detail in the Business Review on page 14, but it is important to note that its implementation does not change our strategy or dividend, and we will remain focused on delivering cash and capital.
During the first half, we delivered adjusted operating profit before tax of
£266 million which primarily reflects an increase in contractual service
margin ('CSM') release from BPA new business and from positive assumption
changes in the prior year (HY 2022: £254 million). However, we are reporting
an IFRS loss after tax of £245 million (HY2022: £1,258 million). This
primarily reflects adverse economic variances which arise from our
comprehensive approach of hedging our Solvency balance sheet, as well as
recurring amortisation and finance costs.
Clear progress across our strategic priorities
We have three strategic priorities which support us in delivering on our
strategy and our purpose; growing organically and through M&A, optimising
our in-force business, and enhancing our operating model and culture.
Delivering against these further strengthens our competitive advantages of
capital efficiency, customer access and cost efficiency. These in turn enhance
everything we do as we grow our business, and underpin the delivery of strong
financial outcomes for our shareholders.
We have made strong progress against all three strategic priorities in the
first half of 2023, as outlined below and on page 5.
Growing organically
We deliver sustainable organic growth by meeting more of our existing
customers' needs and acquiring new customers as we support them to save for,
transition to and secure an income in retirement.
In the first half of 2023, we more than doubled our incremental new business
long-term cash generation which clearly demonstrates the successful execution
of our organic growth strategy and the momentum we are building.
In our capital-light fee-based businesses, we saw incremental new business
long term cash generation increase 49% to £220 million (HY 2022: £148
million). This growth was largely driven by our Workplace business which
contributed £184m (HY 2022: £112m) and reflects our success in leveraging
our competitive advantages in this market, of cost efficiency and customer
access.
Workplace is different to most other markets, in that the majority of growth
comes from your existing customers. So it is critical to retain your existing
customers, which we are now doing very successfully through our enhanced
Workplace proposition. This enables us to both reduce our outflows and benefit
from increased new business inflows, through new joiners to existing schemes
and increased member contributions through higher salary inflation. That is
why 95% of our incremental new business long-term cash generation in the first
half has come from our existing clients.
In addition, by winning new schemes in the market we can turbo charge our
future growth. It is therefore great to see that our new scheme wins continue
to accelerate, as we focus on the fast growing Master Trust segment of the
market. Importantly, in addition to the smaller schemes we have been winning
over the past few years, we are now winning the big schemes too, and we will
see c.£3 billion of new scheme assets transfer to Phoenix in 2024 and 2025
from recent wins. Once onboard, these assets will drive future fund inflows
and incremental new business long term cash generation. This is our Workplace
"flywheel" in action. We are also currently quoting on a significant pipeline
of new Workplace schemes, totalling around £3.5 billion of assets, and are
confident of winning further schemes over time.
Having reinvigorated our Workplace business, we are now focusing our attention
on the Retail market. Here we have a huge embedded growth opportunity, through
better supporting the 1-in-5 UK adults who are already Phoenix Group
customers, with the development of our advice proposition a key enabler. I am
excited by the opportunity we have here to better support individual customers
on their retirement journey and look forward to our long-term strategy
delivering results over the coming years.
Finally, we also continue to deliver sustainable growth in our Retirement
Solutions business, where we are winning in a competitive BPA market, thanks
to our strong proposition and the trusted Standard Life brand. This enabled us
to generate £665 million of incremental new business long-term cash
generation in the first half (HY 2022: £282 million). The BPA market is large
and growing, however our participation is consciously disciplined to ensure
that we maintain our balanced business mix, and limit our exposure to credit
risk.
Alongside BPA, we've also been focused on our individual annuity proposition,
in response to the increased customer demand across the market. I am therefore
pleased to say that in September we launched our first open market individual
annuity product, the Standard Life Pension Annuity. This product is available
to both new and existing customers, and is another example of us filling in
the remaining gaps to complete our full-service customer proposition.
Growing through M&A
We are also growing inorganically through M&A, where we acquire new
customers to deliver better customer outcomes and who we can then help through
their savings life cycles.
We have a long and successful track record of delivering attractive returns
from M&A. Through buying back books at an attractive valuation and
delivering significant cost and capital synergies, we can deliver cash
generation over the life of the business which significantly exceeds the
purchase price. We can also achieve a fast payback due to the accelerated cash
emergence we typically deliver.
For instance, we acquired ReAssure for £3.2 billion in 2020 and have already
remitted £3.7 billion in cash generation, thereby achieving a three-year
payback. We also still expect a further £3.3 billion of cash generation to
emerge over time from the ReAssure acquisition. Our most recent acquisition,
of Sun Life of Canada UK, completed in April. We have received £46 million of
cash generation within the first three months of ownership, which is
equivalent to c.20% of the purchase price.
With c.£435 billion of UK Heritage assets potentially available over time, we
continue to be optimistic about the outlook for further value-accretive
M&A. However, as with all M&A, it is hard to predict exactly which
books of business will come to market, or when, but we believe that the
challenging economic environment makes M&A, both large and small, more
likely. As ever, we stand ready to do our next deal, through our ability to
manage multiple migrations concurrently, and the financial flexibility we have
to fund deals.
Optimising our in-force business
Through leveraging our scale in-force business we deliver capital efficiency
and better returns on our capital, with further progress made in 2023.
We have increased our solvency capital position by £412 million through
management actions, which extends our recent track record of delivering high
levels of recurring actions, and reflects our ongoing focus of optimising and
enhancing our business. These management actions were primarily from
'business-as-usual' activities, which are not reliant on synergies from
M&A transactions.
We have invested into building our in-house asset management capability, which
enables our growth strategy and will support the delivery of management
actions into the very long term, and which contributed £151 million to
solvency capital in the first half. This included the continued optimisation
of our liquid credit book through trade-ups to optimise our credit portfolio
yield and the ongoing investment of annuity backing assets into illiquid asset
classes. We also continue to target the diversification of our portfolio
geographically and successfully deployed £1.1 billion of assets into North
America in the first half.
Phoenix also has an established expertise in delivering actions that improve
our cost and capital efficiency actions and we continue to deliver integration
synergies from our previous acquisitions such as ReAssure. We are confident
that the capabilities we have now built in-house, across asset management and
capital optimisation, will enable us to leverage evolving market dynamics on
an ongoing basis, and to deliver a sustainable level of management actions
over the very long term.
I am also delighted that we are making progress with our Sustainability
ambitions, with the publication of our Net Zero Transition Plan an important
milestone on our journey to being a net zero organisation. It brings together
the clear targets and positive steps we've already taken - such as achieving
our targets for our own operations three years ahead of plan - with our
commitment to work with industry partners and government to drive system-wide
change going forward. Active stewardship is a key component of our plans and
our recent certification as a signatory to the UK Stewardship Code is a clear
statement of our intent to invest our £269 billion of customer assets in a
responsible way.
Enhancing our operating model and culture
Our priority here is delivering leading cost efficiency and a modern
organisation, with further progress delivered in the first half of the year.
A key part of our integration journey is migrating customers from the legacy
Standard Life platform onto the modern TCS Diligenta BaNCS platform, with
digital capabilities now critical as a means of interacting with our
customers. I am therefore pleased that we now have c.80% of our digital
customer journeys transitioned onto BaNCS, supporting an enhanced customer
experience and a more cost efficient platform.
We are also currently executing one of the largest ever insurance Part VII
transfers, as we bring together the legacy Phoenix Life and Standard Life
customers into a single legal entity. This requires us to unify 4 legal
entities and c.7 million policyholders in a seamless manner, and I am pleased
to say that we are making good progress, and hope to complete it by the end of
this year.
At Phoenix we want to be the best place any of us have ever worked, which
includes a great colleague experience and balance between their work and
personal lives. To support this ambition we recently implemented Phoenix Flex,
our new approach to flexible working, which goes well beyond the minimum
requirements set out in legislation and has received good initial feedback
from our colleagues. As well as offering flexibility to our colleagues, it is
vital we have a diverse and inclusive workforce. We continue to make progress
here and are on track to meet our 2023 targets of 40% of senior leaders being
women and a 13% ethnic minority representation in our workforce.
Finally, we are committed to innovating our proposition to better support our
customers, and launched an integrated financial wellness hub, Money Mindset,
to enhance the Standard Life digital app and dashboard, with the intention of
reaching 1.5 million Workplace pension scheme members.
Summary and Outlook
Phoenix is successfully executing on its single strategic focus - helping
customers journey to and through retirement - which, in turn, is enabling us
to grow our business and deliver strong ongoing financial results.
By leveraging our three unique competitive advantages of capital efficiency,
customer access, and cost efficiency, we are delivering strong organic growth.
We more than doubled our incremental new business long-term cash generation in
the first half and are on track to deliver our target of £1.5 billion per
annum by 2025. Our new business net fund flows also grew strongly in the first
half, and we therefore now expect our new business inflows to more than offset
our Heritage run-off outflows from 2024, to deliver positive Group net funds
flows for the first time.
We are also growing through M&A, delivering strong returns, with an
accelerated payback. M&A remains a strategic priority and we are
optimistic of further acquisition opportunities emerging over time and are
confident in our ability to both fund and execute successfully.
Delivering on our strategy underpins our dependable dividend, with our clear
policy which is to 'pay a dividend that is sustainable and grows over time'.
The Board will assess the level of the 2023 Final dividend alongside the Full
Year results next year, with the decision informed by our business performance
across the whole of 2023.
Thank you
Delivery of such a strong set of results is only achieved through the hard
work and dedication of our exceptional people, so I'd like to take this
opportunity to thank each and every one of my colleagues across the Group for
their contributions.
We have built good momentum in the first half of 2023 and I look forward to
seeing further progress in the second half and beyond.
Andy Briggs
Group Chief Executive Officer
Business review
Delivering cash, resilience and growth
Strong performance across our core financial metrics
Phoenix has delivered a strong financial performance in the first half of
2023, with our organic growth accelerating as we invest into our growth
propositions, which is funded by our high levels of predictable cash
generation and is underpinned by our resilient balance sheet.
We have delivered strong cash generation of £898(1) million in the period and
are on track to deliver at the top-end of our 2023 target range of
£1.3-to-£1.4 billion.
We have also maintained our resilient SII balance sheet, with a SII surplus of
£3.9 billion and a Shareholder Capital Coverage Ratio of 180%, which are
after the investment of surplus capital into growth.
Our incremental new business long-term cash generation has more than doubled
year-on year to £885 million, and with a buoyant BPA market and real momentum
building in our Workplace business, I am confident we will achieve another
year of strong organic growth.
The Board has declared an Interim dividend of 26.0p per share, in line with
our Final 2022 dividend, which is a 5% year-on-year increase.
IFRS 17 transition
On 1 January 2023, the Group adopted the new accounting standard, IFRS 17:
'Insurance Contracts', with comparatives restated from 1 January 2022. IFRS 17
is an accounting change which requires a company to recognise profits as it
delivers insurance services (rather than when it receives premiums) and to
provide information about insurance contract profits the company expects to
recognise in the future.
However, it does not alter the underlying economics of our business and it
therefore has no impact on our strategy or dividend, and we will continue to
remain focused on delivering cash and capital. More details about the impact
of the IFRS 17 transition are detailed on page 14.
The Group's HY 2023 adjusted operating profit increased to £266 million (HY
2022: £254 million) which primarily reflects an increase in the CSM release
from BPA new business and from positive assumptions changes in the prior year,
but we are reporting an IFRS loss after tax of £245 million (HY 2022: £1,258
million). This primarily reflects £253 million of adverse investment return
variances in relation to our Solvency balance sheet hedging, along with
recurring amortisation (£161 million) and finance costs (£99 million).
A strong financial performance in HY 2023
Financial performance metrics: 30 June 30 June YOY
2023
2022
change
Cash Cash generation £898m(1) £950m -5%
New Business Incremental long-term cash generation £885m £430m +106%
Dividend Interim dividend per share 26.0p 24.8p +5%
IFRS Loss after tax £(245)m £(1,258)m(2) -80%
Adjusted operating profit before tax £266m £254m(2) +5%
30 June 31 December 6-mth
2022
2022
change
Balance sheet metrics:
Solvency II PGH Solvency II surplus £3.9bn £4.4bn -11%
Capital
PGH Shareholder Capital Coverage Ratio ('SCCR') 180% 189% -9%pts
In-force cash Group in-force long-term free cash £12.5bn £12.1bn +3%
Assets Assets under administration £269bn £259bn +4%
Leverage Fitch leverage ratio(3) 25% 25%(3) -
1 Includes £450m remitted from the life companies in July 2023
2 Restated comparative to reflect adoption of IFRS 17
3 FY22 restated Fitch leverage ratio is estimated by management on an IFRS
17 basis and reflects the adoption of a market-consistent ratio
calculation methodology. Ratio allows 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 92.
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 2023 30 June 2022
Cash and cash equivalents at 1 January 503 963
Net cash receipts from operating companies(1) 898(2) 950
Uses of cash:
Operating expenses (44) (39)
Pension scheme contributions (9) (9)
Debt interest (125) (124)
Non-operating cash inflows/(outflows) 178 (165)
Uses of cash before shareholder dividend - (337)
Shareholder dividend (260) (248)
Total uses of cash (260) (585)
Support of BPA activity (195) (102)
Cost of acquisition (Sun Life of Canada UK) (250) -
Closing cash and cash equivalents at 30 June 696 1,226
1 Total cash receipts include £139 million received by the holding
companies in respect of tax losses surrendered (HY 2022: £40
million)
2 Shown on proforma basis to include £450 million remitted from the life
companies in July
Cash receipts
Cash generated by the operating companies during the period was £898 million
(HY 2022: £950 million). This includes £450m remitted from the life
companies in early July, reflecting the timing of the Board meeting. The Group
has set a one-year cash generation target range of £1.3-to-£1.4 billion for
2023, and is on track to deliver at the top-end of this range.
Uses of cash
Operating expenses of £44 million (HY 2022: £39 million) represent corporate
office costs, net of income earned on holding company investment balances. The
small increase relative to 2022 reflects increased costs associated with the
development of our capabilities across our Group functions that are required
to support our growth strategy.
Pension scheme contributions of £9 million were made in the period, which are
in line with prior year (HY 2022: £9 million).
Debt interest of £125 million (HY 2022: £124 million) reflects interest paid
in the period on Group debt instruments and is broadly stable.
Non-operating net cash inflows of £178 million (HY 2022: £165 million net
cash outflow) include £266 million in respect of net collateral cash and
hedge close outs. This is partially offset by £71 million of integration
costs across Standard Life and ReAssure and £13 million of costs in relation
to the IFRS 17 implementation project.
Shareholder dividend
The shareholder dividend of £260 million represents the payment of the 2022
Final dividend in May. This has increased year-on-year, from £248million, due
to the 5% increase announced alongside our Full Year 2022 results.
Support of BPA activity
Funding of £195 million (HY 2022: £102 million) has been provided to the
life companies to support the strong performance in the first half in our BPA
business, with £3.2 billion of premiums written in the first half (HY 2022:
£1.6 billion).
Group closing cash balance
The Group seeks to hold a minimum cash buffer of around £300-400 million,
which is sufficient to cover 6 months of costs and dividends. The Group's
closing cash balance of £696 million means that we have surplus cash
available.
Group in-force long-term free cash
Group in-force long-term free cash is comprised of the long-term cash
generation expected to emerge from our current in-force business over its
lifetime 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. It is a measure
of the cash that will be available to our shareholders over time, from the
business we have on our books today.
During the first half, this has grown by £0.4 billion to £12.5 billion at 30
June 2023 (FY 2022: £12.1 billion). This is primarily driven by a net £0.7
billion increase through organic growth and a net £0.2 billion increase
through M&A growth, which more than offset our uses of cash.
£12.5 billion of Group in-force long-term free cash underpins the
sustainability of our c.£0.5 billion annual dividend cost over the very long
term. As it continues to grow, it will support us in delivering on our policy
of paying a dividend that is sustainable and grows over time.
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 £3.9 billion, and includes the accrual for the deduction of our
2023 Interim dividend.
Our Shareholder Capital Coverage Ratio ('SCCR') is 180%, after the investment
of surplus capital into growth during the first half. The ratio is at the
top-end of our 140%-to-180% target range, providing future capacity to invest
into both organic and inorganic growth.
Change in Group Solvency II surplus and SCCR (estimated)
The Group Solvency II surplus was £3.9 billion (FY 2022: £4.4 billion) and
our SCCR was 180% as at 30 June 2023 (FY 2022: 189%). The reduction since FY
2022 is largely due to our proactive decision to invest c.£0.4 billion of
surplus capital into growing our business both organically and inorganically,
which has increased our Group in-force long-term free cash, and will drive
future cash and capital generation.
Our ongoing surplus emergence and release of capital requirements contributed
£0.3 billion to our SII excess, increasing the SCCR by 10%pts.
Our ability to deliver management actions is a key differentiator for Phoenix.
We have continued to demonstrate this capability with £0.4 billion delivered
in the period, increasing the SCCR by 16%pts. The significant ongoing level of
management actions reflects our focus on optimising and enhancing our
business, with actions in the first half primarily from repeatable
'business-as-usual' actions. These include the dynamic optimisation of our
liquid credit portfolio to achieve higher yields and our ongoing illiquid
asset origination. Other actions during the period include ongoing cost and
capital efficiency actions, along with integration benefits from ReAssure.
We have invested into enhancing our in-house asset management capabilities and
are the experts in delivering cost and capital synergies. We therefore
continue to be confident of delivering management actions into the very long
term.
As ever, operating costs, dividends and interest totalled £0.4 billion,
reducing the SCCR by 9%pts.
We experienced a small adverse economic variance of £0.2 billion, reducing
the SCCR by 3%pts, principally as result of equity volatility in the year,
alongside adverse property markets.
Other adverse impacts of £0.2 billion reduced the SCCR by 5%pts, and include
ongoing project and integration costs, and £0.1 billion impact from setting
up a new European subsidiary that was required post-Brexit to continue serving
some of our overseas Heritage customers.
We have also proactively chosen to invest £0.4 billion of surplus capital
into growth. This includes £0.2 billion of capital investment to fund our
first half BPA premiums, reducing the SCCR by 10%pts, and £0.1bn of
investment into our organic growth propositions reducing the SCCR by a further
2%pts. We also saw a £0.1 billion net adverse impact arising on the
completion of the Sun Life of Canada UK acquisition, which reduced the SCCR by
6%pts.
Sensitivity and scenario analysis
As part of the Group's internal risk management processes, the Own Funds and
regulatory SCR are regularly tested against a number of financial scenarios.
The following table provides illustrative impacts of changing one assumption
while keeping others unchanged and reflects the business mix at the balance
sheet date. Extreme market movements outside of these sensitivities may not be
linear.
While there is no value captured in the Group stress scenarios for recovery
management actions, the Group does proactively manage its risk exposure.
Therefore in the event of a stress, we would expect to recover some of the
loss reflected in the stress impacts shown. All sensitivities remain within
risk appetite and are small in the context of the Group's £3.9 billion
Solvency II surplus.
Illustrative risk exposure stress testing
Estimated impact(1) on PGH Solvency II Surplus SCCR
£bn
%
Solvency II base 3.9 180
Equities: 20% fall in markets (0.1) 2
Long-term rates: 80bps rise in interest rates(2) 0.0 3
Long-term rates: 70bps fall in interest rates(2) 0.0 (1)
Long-term inflation: 60bps rise in inflation(3) 0.0 1
Property: 12% fall in values(4) (0.2) (7)
Credit spreads: 135bps widening with no allowance for downgrades(5) (0.3) (6)
Credit downgrade: immediate full letter downgrade on 20% of portfolio(6) (0.3) (6)
Lapse: 10% increase/decrease in rates(7) (0.1) (2)
Longevity: 6 months increase(8) (0.4) (7)
1 Assumes stress occurs on 1 July 2023 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 60bps 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 the annuity portfolio is rebalanced back towards its
original credit rating profile and makes allowance for losses from the spread
widening which would be associated with downgrades.
7 Assumes most onerous impact of a 10% increase/decrease in lapse rates
across different product groups.
8 Applied to the annuity portfolio.
Managing rewarded and unrewarded market risks
We have a particularly low appetite for equity, interest rate, inflation and
currency risks, which we see as unrewarded, i.e. the return on capital for
retaining the risk is lower than for hedging it. In order to stabilise our SII
surplus, we regularly monitor risk exposures and use a range of hedging
instruments to remain within a Board approved target range.
We do retain the credit and property risk in our c.£34 billion shareholder
credit portfolio, where we see these risks as rewarded. The shareholder credit
assets are primarily used to back the Group's annuity portfolio, where
exposure to these risks is needed to cashflow match the annuity liabilities.
Stress testing is used to inform the level of risk to accept and to monitor
exposures against risk appetite.
We actively manage our portfolio to ensure it remains high quality and
diversified, and to maintain our sensitivities within risk appetite. Our
portfolio is 99% investment grade, and during the first half we have seen more
credit upgrades than downgrades and suffered no defaults; testament to the
proactive approach taken by our in-house asset management team.
We also remain conservative in our property exposure. We have c.£4 billion of
our credit portfolio exposed to Equity Release Mortgages, which is all UK
based with an average rating of AA and average loan-to-value ('LTV') of 33%,
and c.£1.0 billion in Commercial Real Estate which is high quality and all
UK-based with an average LTV of 48%.
Managing demographic risks
We have three key demographic risks that we manage. Lapse risk arises from
customers surrendering policies early or keeping policies with valuable
guarantees for longer, which we manage through our strong customer service
proposition. Our longevity risk principally arises from our annuity book, but
this is managed through reinsurance. We retain around half of this risk across
our current in-force book, and reinsure most of this risk on new business.
Mortality risk arises from our protection business and we seek to manage this
as part of a well-diversified 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 2023, the life company free surplus was £1.7 billion (FY
2022: £2.3 billion). The following table analyses the movement in the period.
Estimated position as at 30 June 2023
£bn
Opening free surplus 2.3
Surplus generation and release of capital requirements 0.3
Management actions 0.5
Cash remittances to holding companies (0.8)
New business strain including BPA (0.3)
Cash remittances from holding companies to fund BPA 0.2
Economics (0.2)
Other (0.3)
Closing free surplus 1.7
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 88.
Please see the APM section on page 92 for further details of these measures.
Incremental new business long-term cash generation
I am delighted that we have more than doubled incremental new business
long-term cash generation to £885 million in the first half (HY 2022: £430
million). This is a fantastic start to the year, enabled by the success of our
organic growth strategy and demonstrates the attractive return on the surplus
capital we are investing into growth.
Retirement Solutions
The BPA market is particularly buoyant with an unprecedented number of schemes
coming to market due to high interest rates having narrowed the funding gap
for many defined benefit pensions schemes and therefore making BPAs more
affordable for trustees. Our strong BPA proposition and the strength of the
Standard Life brand is helping us to win new business in a competitive market.
However, we remain disciplined in our participation to ensure we are
optimising our return on capital and to ensure we limit credit risk to a
diversified proportion of our balance sheet.
I'm really pleased with the strong start we have made to 2023, having doubled
our BPA premiums year-on-year, with £3.2 billion of premiums completed across
10 external transactions (HY 2022: £1.6 billion). This has delivered a record
first half £665 million of long-term cash generation, a 136% year-on-year
increase (HY 2022: £282 million).
We have invested around £195 million of capital in the first half, meaning
our strain has remained broadly stable at 6% (FY 2022: 5.8%) inclusive of our
capital management policy (3.9% on a pre-capital management policy basis).
Despite a competitive market, we have also maintained our pricing discipline
and been targeted in our scheme selection to enable us to achieve an
attractive cash multiple of 3.4x.
Pensions & Savings - Workplace
Building on the momentum we saw in 2022, our Workplace business continues to
grow through the Standard Life brand. This is due to the investment we have
made into our enhanced Workplace proposition, which is helping us to both
retain our existing schemes, and win new schemes in the market.
Strong scheme retention enables us to reduce our outflows and to stabilise the
inflows from our existing business. This means we can then benefit from the
Workplace compounding "flywheel" effect of new business growth coming from new
joiners to our existing schemes, and increased member contributions including
salary inflation.
Given there is no acquisition cost to incur on these incremental flows, and
our customer administration platform is already highly cost efficient, this
embedded growth generates high levels of long-term cash generation. This has
enabled us to deliver a significantly improved level of incremental new
business long-term cash generation of £184 million in the period, a 64%
year-on-year increase (HY 2022: £112 million). Although, as ever, it is
important to note that Workplace new business long-term cash generation is
seasonally more weighted to the first half, due to the annual first half
benefit from salary increases.
In addition to the embedded growth from our existing schemes, we are also now
winning new schemes in the market. These will both increase the stock of
existing assets and accelerate new inflows, driving future incremental new
business long-term cash generation over time.
Pensions & Savings - Retail
Incremental new business long-term cash generation of £11 million from our
Retail business is broadly stable year-on-year (HY 2022: £12 million). While
the current new business contribution from this area of the business is small,
it has remained resilient against a challenging economic backdrop for our
retail customers. We are firmly focused on leveraging our strong Standard Life
brand and access to our c.12 million existing customers, to develop innovative
retirement savings and income solutions to support growth in this business
over the long term.
Europe and SunLife
The incremental new business long-term cash generation from our European and
SunLife businesses at £25 million (HY 2022: £24 million), is broadly stable
year-on-year, with the resilient outcome pleasing given the difficult economic
backdrop for these businesses.
Group AUA
Group AUA as at 30 June 2023 was £269 billion (FY 2022: £259 billion), with
the increase in the period largely driven by the inclusion of c.£8 billion of
AUA from Sun Life of Canada UK following the completion of this acquisition in
April.
From a net fund flows perspective, I am delighted to see that we are closing
the gap on our Group net outflows which totalled £1.5 billion (HY 2022: £3.1
billion), through stronger new business inflows and reduced Heritage outflows.
Our strong ongoing progress and our pipeline ahead in both Workplace and BPA
means that I am now confident that we are on track to deliver positive Group
net inflows from 2024, for the first time in Phoenix's history.
Heritage run-off net flows
Heritage run-off net outflows in the period were £4.6 billion (HY 2022: £4.9
billion net outflows), which reflect policyholder outflows on claims such as
maturities and surrenders, net of total premiums received in the period from
in-force contracts.
New Business net flows
New Business net inflows in the period were £3.1 billion (HY 2022: £1.8
billion net inflows), which reflect the net fund inflows from our organic
growth businesses that are open to new business, including Retirement
Solutions, Pensions & Savings, Europe and SunLife. Individual business
segments are explained in further detail below.
Retirement Solutions net flows
Net inflows in Retirement Solutions, which encompasses our BPA and individual
annuity businesses, were £2.0 billion in the period (HY 2022: £0.4 billion
net inflow). Gross inflows during the period were £3.4 billion (HY 2022:
£1.9 billion), inclusive of £3.2 billion of new BPA premiums written over
the first six months. This is an impressive 100% increase year-on-year (HY
2022: £1.6 billion), demonstrating the strength of our BPA proposition.
Outflows of £1.4 billion in the period (HY 2022: £1.5 billion) primarily
reflect the natural run-off of our in-payment annuities.
Pensions & Savings: Workplace net flows
Net inflows within our fee-based Workplace business were £1.8 billion in the
period (HY 2022: £1.7 billion net inflow), slightly up year-on-year after
being in net outflow prior to 2022. This demonstrates the strong momentum we
have built in our Workplace business over the past 18 months. Gross inflows
were £3.4 billion, slightly up on prior year (HY22: £3.2 billion), partly
reflecting increased flows due to new joiners to existing schemes and
increased member contributions including salary increases. The outflows year
to date of £1.6 billion is broadly consistent with HY 2022 (£1.5 billion)
and largely reflects individual customers taking their retirement savings.
Our enhanced proposition means that we are both retaining our existing schemes
and winning new schemes in the market. I am pleased to see the momentum in our
new scheme wins accelerating. Importantly, we are now winning the big schemes
too, which has enabled us to attract around £3 billion of new scheme assets
over the past 12 months. These will transfer across to us in 2024 and 2025,
therefore benefitting future net fund flows. We are also quoting on a strong
pipeline of new schemes, totalling c.£3.5 billion of assets, and we are
confident of winning further schemes over time.
Pensions & Savings: Retail net flows
Net outflows within our Retail businesses were £0.8 billion in the period (HY
2022: £0.7 billion net outflow), broadly consistent year-on-year, with a
marginal improvement in gross inflows at £1.0 billion in the period (HY 2022:
£0.9 billion). This is really pleasing, given the difficult macro environment
in the Retail market. Outflows year to date are £1.8 billion (HY 2022: £1.6
billion), largely reflecting the natural run-off.
Europe and SunLife net flows
We have seen net inflows of £0.1 billion (HY 2022: £0.4 billion net inflows)
from our Europe and SunLife businesses. Gross inflows in the period were £1.2
billion (HY 2022: £1.3 billion), primarily reflecting our individual
retirement products sold in the UK and Europe. Outflows were £1.1 billion in
the period (HY 2022: £0.9 billion) and are largely due to the natural run-off
of our European business.
Other movements including markets
AUA increased by £3.5 billion (HY 2022: £38.5 billion decrease), largely due
to the impact of rising equity markets.
IFRS results
IFRS profit/(loss) is a GAAP measure of financial performance and is reported
in our statutory financial statements on page 31. Following the adoption of
IFRS 17: 'Insurance Contracts', comparatives shown have been restated from 1
January 2022.
Adjusted 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 Note 4 to the financial statements and the APM section on page 92
for further details of this measure.
IFRS 17 transition
IFRS 17 is a global accounting standard that was implemented on 1 January 2023
and is an accounting change which does not alter the underlying economics of
our business. As a result, IFRS 17 does not change our strategy or dividend,
and we will remain focused on delivering cash and capital.
As a result of our successful track record of delivering value-accretive
M&A and subsequent integration activity, c.95% of our business was
recognised at fair value on transition, which results in the establishment of
a lower Contractual Service Margin ('CSM') and also increases the volatility
in our shareholders' equity.
IFRS adjusted shareholders' equity (inclusive of the CSM net of tax) was £5.2
billion at 31 December 2022, 24% higher than IFRS 4 shareholders' equity of
£4.2 billion (see APM section on page 92 for further details of this
measure). The Group's CSM (gross of tax) at 31 December 2022 was £2.6 billion
and this grew at 7% year-on-year in 2022. It represents a significant store of
future profits and is expected to release into the IFRS income statement at
c.5-7% per annum.
IFRS shareholders' equity was £3.2 billion at 31 December 2022, which is 24%
lower than IFRS 4 of £4.2 billion, due primarily to £(0.4) billion lower
operating profit as a result of items transferred to the CSM, and a £(0.7)
billion adverse economic impact from increased accounting volatility under
IFRS 17 related to our hedging approach.
Adjusted operating profit before tax for FY 2022 was £0.6 billion, which is
c.50% lower than under IFRS 4 of £1.2 billion. This principally reflects the
transfer of £(0.4) billion of items to the CSM including annuity new business
profits and model, methodology and assumption changes, as well as £(0.2)
billion of items not recognised in adjusted operating profit under IFRS 17,
and a £(0.2) billion lower contribution from With-Profits and Unit-Linked
business. These adverse movements are partially offset by a £0.2 billion
release of the CSM.
HY 2023 IFRS financial performance
IFRS profit and loss statement
£m 30 June 2023 Restated
30 June 2022
Heritage(2) 117 114
Open(2) 182 171
Corporate Centre(2) (33) (31)
Adjusted operating profit before tax 266 254
Investment return variances and economic assumption changes (253) (1,540)
Amortisation and impairment of intangibles (161) (175)
Other non-operating items (206) (146)
Finance costs (99) (103)
Profit before tax attributable to non-controlling interest 16 31
Loss before tax attributable to owners (437) (1,679)
Tax credit attributable to owners 192 421
Loss after tax attributable to owners (245) (1,258)
1 Fitch leverage ratio is estimated by management on an IFRS 17 basis and
reflects the adoption of a market-consistent ratio calculation methodology.
Ratio allows for currency hedges over foreign currency denominated debt
2 30 June 2022 has been restated under IFRS 17 and reflects the allocation
of expenses from service companies, previously shown as their own business
segment
IFRS loss after tax attributable to owners
The Group generated an IFRS loss after tax attributable to owners of £245
million (HY 2022: loss of £1,258 million), with the year-on-year reduction
primarily reflecting a £1,287 million reduction in economic variances due to
a much lower level of market volatility in the period, particularly interest
rates.
Basis of adjusted operating profit
Adjusted operating profit is based on expected investment returns on financial
investments backing business where assets returns accrue to the shareholder
and surplus assets over the reporting period, with allowance for the
corresponding expected movements in liabilities (being the interest cost of
unwinding the discount on the liabilities). Adjusted operating profit includes
the unwind of the CSM and risk margin attributable to the shareholder.
The principal assumptions underlying the calculation of the long-term
investment return are set out in Note 5.1 to the IFRS condensed consolidated
interim financial statements.
Adjusted operating profit includes the effect of variances in experience
relating to the current period for non-economic items, such as mortality and
expenses. It also incorporates the impacts of asset trading and portfolio
rebalancing where not reflected in the discount rate used in calculating
expected return. Any difference between expected and actual investment return,
along with other economic variances described further in Note 4.1 are shown
outside of adjusted operating profit. Adjusted operating profit is net of
policyholder finance charges and policyholder tax.
Adjusted operating profit
The Group generated increased adjusted operating profit of £266 million (HY
2022: £254 million), which reflects an increase in the CSM release from BPA
new business and from positive assumption changes relating to the prior year.
Heritage adjusted 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 £117 million in the period, broadly consistent
year-on-year (HY 2022: £114 million).
Open adjusted operating profit
The Group's Open business segment delivered an operating profit of £182
million (HY 2022: £171 million). This includes operating profits generated in
the Group's Retirement Solutions business, Pensions and Savings business, as
well as new business distributed through the Group's SunLife brand and our
European operations. The increase year-on-year primarily reflects an increase
in the CSM release from both BPA new business and positive assumption changes
in the prior year.
Corporate Centre
Corporate Centre includes group costs in the period of £33 million (HY 2022:
£31 million), which was broadly stable year-on-year and mainly comprise
project recharges from the service companies.
Investment return variances and economic assumption changes
The net adverse economic variances of £253 million (HY 2022: £1,540 million)
have primarily arisen as a result of rising yields and a rise in global equity
markets, offset by rising inflation, narrowing credit spreads and
strengthening of GBP. Movements in yields, inflation, currency 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 future profits on
investment contracts measured under IFRS 9 and the Solvency Capital
Requirements. While this gives rise to volatility in the IFRS results,
importantly the Group's cash generation and dividend capacity are unaffected
by this due to the Group's resilient Solvency II surplus.
Amortisation and impairment of acquired in-force business and other intangibles
The previously acquired in-force business, relating to IFRS 9 accounted capital-light fee-based business, is being amortised in line with the expected run-off profile of the investment contract profits to which it relates. The amortisation and impairment of acquired in-force business during the period of £158 million (HY 2022: £172 million) has decreased year-on-year reflecting the impact of the run-off. Amortisation and impairment of other intangible assets totalled £3 million in the period (HY 2022: £3 million).
Other non-operating items
Other non-operating items in the period totalled a £206 million loss (HY
2022: £146 million loss). This includes £59 million of expenditure to
support our growth strategy and a £52 million impact from setting up a new
European subsidiary that was required post-Brexit to continue serving some of
our overseas Heritage customers. Other items include £38 million of costs
relating to our integration and finance transformation activities, £17
million in respect of ongoing transition and transformation projects, £52
million of other corporate project costs, and net other one-off items
totalling £17 million. This was partially offset by a £66 million gain on
the acquisition of Sun Life of Canada UK.
Finance costs
Finance costs of £99 million reflect interest borne on the Group debt
instruments and is stable year-on-year (HY 2022: £103 million).
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 £192 million (HY 2022: £421 million tax credit)
based on a loss (after policyholder tax) of £437 million (HY 2022: loss of
£1,679 million). A reconciliation of the tax charge is set out in Note 7 to
the IFRS condensed consolidated interim financial statements.
Contractual Service Margin ('CSM')
The CSM represents a stock of future profits that will unwind into the profit
and loss in future years.
The Group had a CSM (gross of tax) of £2.7 billion as at 30 June 2023, which
grew by 5% in the first half (FY 2022: £2.6 billion) primarily due to new BPA
business written and the acquisition of the Sun Life of Canada UK business in
2023, which is partly offset by the CSM release into the income statement. The
CSM release of £143 million has increased by 25% year on year (HY 2022: £114
million), reflecting the growth in annuity CSM from new business and
favourable assumption changes relating to the prior year. This release
represents 5% of the closing CSM (gross of tax) pre-release of £2.9 billion.
Fitch leverage ratio
The Group's debt instruments have a credit rating provided by Fitch Ratings,
where the Group seeks to maintain an investment grade credit rating. The Group
therefore targets a Fitch leverage ratio range of 25-30%, as this is a key
factor in determining an investment grade credit rating under the Fitch
methodology. During 2023 the Group has updated its Fitch leverage ratio
calculation for IFRS 17, alongside which it updated the calculation to include
share of the policyholder estate for market consistency, and this was agreed
with Fitch as part of our annual review.
As at 30 June 2023, the Group's Fitch leverage ratio is 25%(1) which is
unchanged compared to FY 2022 on a restated basis (25%(1)). The ratio is
therefore at the bottom of our target range, which provides debt leverage
capacity for future M&A if required.
1 FY22 restated Fitch leverage ratio is estimated by management on an IFRS
17 basis and reflects the adoption of a market-consistent ratio calculation
methodology. Ratio allows for currency hedges over foreign currency
denominated debt
Dividend
2023 Interim dividend
As ever, our 2023 Interim dividend of 26.0 pence per share is equal to the
2022 Final dividend, which is therefore a 5% year-on-year increase compared to
the 2022 Interim dividend. This reflects the strong dividend growth we
delivered as a result of our 2022 performance.
2023 dividend outlook
Our 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 2023 and beyond.
In line with our policy, the Board will review our 2023 business performance
across a broad range of strategic and financial metrics, ahead of the Full
Year results next year, and consider the level of the Final 2023 dividend at
that time.
Outlook
Looking ahead
Phoenix has delivered a strong set of financial results in the first half of
2023, across our financial framework of cash, resilience and growth, through
executing our strategy and delivering on our purpose. I am confident that the
momentum we have built in the first half leaves us well positioned to deliver
a successful second half and beyond.
We are on track to deliver all of our financial targets for 2023. This
includes delivering at the top-end of our 2023 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 SCCR (140-180%) and Fitch leverage
ratio (25-30%).
We remain focused on allocating capital, in line with our capital allocation
framework, that ensures we only invest in growth opportunities that drive real
value for our shareholders. With our SCCR currently at the top-end of our
target range at 180%, we have surplus capital available to invest into both
organic and inorganic growth opportunities going forward.
We have had a strong first half from an organic growth perspective, with £885
million of incremental new business long-term cash generation already
delivered. I am therefore confident that we will deliver another strong year
of organic growth across 2023 that exceeds 2022, as we progress towards our
target of delivering c.£1.5 billion per annum by 2025.
We expect the BPA market to remain buoyant due to the structural growth
drivers that are being accelerated by the current economic environment, where
we have a strong pipeline of business that we are quoting on and are therefore
confident of fully investing our target capital allocation of around £300
million into BPA for 2023. In addition, we expect the momentum we have built
in our Workplace market to continue driving growth in our capital-light
fee-based business.
The success of our organic growth strategy also means that we are seeing an
acceleration in our new business net fund flows. We are writing new BPA
premiums that are more than offsetting the annuity run-off profile, while the
strong retention in our Workplace business is enabling us to benefit from the
embedded growth in our existing schemes and is reducing our outflows. We also
continue to win new Workplace schemes, which further grows our baseline stock
of assets and also accelerates our future new business growth over time.
As a result, we now expect our new business inflows to more than offset the
Heritage run-off outflows in 2024, to achieve positive Group net fund flows
for the first time. A pivotal moment for Phoenix.
Whilst recognising the ongoing challenges of the difficult macro environment
for many, counterintuitively higher inflation and interest rates are
accelerating our structural growth opportunities across the market. We are
therefore 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 future
market volatility. This underpins our resilient cash generation which means we
can confidently continue to invest into organic and inorganic growth, and pay
a dividend that is sustainable and grows over time.
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
Risk management
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 2022 Annual Report and Accounts,
published in March 2023.
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 and emerging risks for the Interim Report. As a result of this
review, the 13 risks noted in the Group's 2022 Annual Report and Accounts have
been retained, with no changes to the overall level of risk exposure.
Risk Environment
The external risk environment remains uncertain and is driven by a combination
of factors that 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 rising interest rates, inflation and geopolitical risks
· The cost of living crisis and persistent high inflation is negatively
affecting the lives of the Group's customers, particularly those most
vulnerable, as borrowing costs rise. The Group is using customer behaviour
research and analysis to support customers, including providing cost-of-living
support and information across all contact channels and encouraging customers
to get in touch for help.
· Geopolitical risk remains prominent, including the ongoing effects
arising from the conflict in Ukraine, and the risks of supply chain disruption
including that arising from deterioration in the relationship between the
United States of America and China. The Group continues to monitor
developments across the political environment.
· he regulatory change agenda continues to have potentially significant
implications for the Group. The Group has ongoing engagement with the Treasury
and PRA on the draft Solvency II Reforms. Compliance with the FCA's new
Consumer Duty continues to be a priority, having achieved material compliance
for open products at 31 July 2023, focus turns to closed products ahead of the
31 July 2024 deadline. Further work is required to streamline and automate
IFRS 17 processes to support efficient financial reporting in the future.
The Group's Risk Management (RMF) and rigorous Stress and Scenario Testing
(SST) Programme are essential in helping it to understand its risks exposures
and how these change in stressed circumstances. During 2023, 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 2 Grow organically and through M&A 3 Enhance our operating
in-force business
model and culture
Risk Impact Mitigation Strategic priorities Change from 2022 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 This risk was assessed as 'Heightened' in the Group's 2018 Annual Report and
transition acquired businesses growth opportunities, including acquisitions of life and pensions books of and applies a clear set of criteria to assessing these opportunities.
Accounts due to the transformational nature of the Standard Life acquisition.
business.
2 The assessment of the level of exposure to this risk is unchanged from the
The Group's acquisition strategy is supported by the Group's financial
2018 position due to the impact of ongoing acquisition and transition
The transition of acquired businesses into the Group, including customer strength and flexibility, strong regulatory relationships and its track 3 activity.
migrations, could introduce structural or operational challenges that, without record of generating value and delivering good customer outcomes that are in
sufficient controls, could result in the Group failing to deliver the expected line with expectations. The integration of ReAssure Ltd is continuing as planned, with the integration
outcomes for customers or value for shareholders.
of key functions progressing well. Functions to still be integrated includes
The financial and operational risks of target businesses are assessed in the Finance and Asset Management. The Group continues to develop its partnership
acquisition phase and potential mitigants are identified. with TCS to support its strategic deliverables. Further customer migrations
are planned through to 2026, which will support delivery of the Group's
Integration plans are developed and resourced with appropriately skilled staff strategic objectives.
to ensure target operating models are delivered in line with expectations.
The Group's priority at all times is on delivering for its customers. On 7 February 2023, the Group announced that a further c. 3 million policies,
currently administered on the ReAssure Alpha platform, would be transitioned
Customer migrations are planned thoroughly with robust execution controls in to the TCS BaNCS platform by 2026. Detailed planning is underway for these
place. Lessons learned from previous migrations are applied to future activity migrations, which will enable all Phoenix policies to benefit from TCS'
to continue to strengthen the Group's processes. significant ongoing investment in the platform.
The Group completed its purchase of Sun Life Assurance Company of Canada UK, a
UK heritage book life insurance company, on 3 April 2023. As a result, the
Group has grown by a further 480,000 in-force policies and £10 billion of
assets under management. The acquisition is expected to deliver c. £500
million of incremental long-term cash generation. Detailed integration
activity has commenced.
The Group's strategic partnerships fail to deliver the expected benefits Strategic partnerships are a core enabler for delivery of the Group's The Group has established engagement processes with abrdn plc to oversee and 1 During 2023 the Group has continued to strengthen controls around the
strategy; they allow it to meet the needs of its customers and clients and develop the strategic partnership. These processes reflect the simplified and
operation of its strategic partnerships, who are critical to the successful
deliver value for its shareholders. The Group's end state operating model will extended strategic partnership between the Group and abrdn plc that was 2 delivery of the Group's strategic objectives and to achieving good outcomes
leverage the strengths of its strategic partners whilst retaining in-house key announced in February 2021.
for the Group's c. 12 million customers.
skills that differentiate it from the market.
3
The Group's engagement with Diligenta, and its parent TCS, adheres to a
The Group continues to develop its partnership with TCS to support its
However, there is a risk that the Group's strategic partnerships do not rigorous governance structure, in line with the Group's Supplier Management strategic deliverables. Planning for further c. 3 million policies to be
deliver the expected benefits leading to adverse impacts on customer outcomes Model. As a result, productive and consistent relationships have been transferred from the Group's Alpha administration platform as the Group
to adverse impacts on customer outcomes, strategic objectives, regulatory developed with TCS, which will continue to develop throughout future phases of progresses towards TCS BaNCS being the sole administration platform for all
obligations and the Group's reputations and brand. the enlarged partnership. This includes working with Diligentia to implement customer policies.
the Group's approach to the new Consumer Duty.
Some of the Group's key strategic partnerships include:
During the first six months of 2023, the Group successfully transferred £470
The Group has established processes to oversee services provided by HSBC in million of custody accounts for Phoenix Wealth to HSBC, further boosting its
abrdn plc: Provides investment management services to the Group including the line with its Supplier Management Model. strategic partnership.
development of investment solutions for customers. abrdn plc manages
c. £147.5 billion of the Group's assets under administration, at 30 June The Group takes steps to monitor its supplier concentration risks and has The simplified and extended partnership with abrdn plc continues to advance
2023. business continuity plans to deploy should there be a significant failure of a towards the Target Operating Model with significant progress towards the
strategic partner. transfer of Wrap platform products expected in 2023 ahead of the transfer
TCS: The Group's enlarged partnership with TCS is expected to support growth
occurring in subsequent years. .
plans for the Retirement Solutions and Pensions and Savings businesses,
enabling further market-leading digital and technology capabilities to be
developed to support enhanced customer outcomes.
HSBC: Provides custody and fund accounting services to the Group to manage
c. £112 billion of its
unit-linked operations.
The Group fails to deliver long-term organic growth The Group aims to deliver sustainable cash generation by achieving organic The Group's Business Unit structure brings renewed focus and accountability. 2 At its Capital Markets Event in 2022, the Group set is first incremental new
growth in excess of the run-off from its in-force business. The key areas of growth are Pensions & Savings and Retirement Solutions.
business long-term cash generation target as a result of the significant
3 progress made by both Pensions & Savings and Retirement Solutions.
Confidence in the Group might be diminished if it fails to deliver against Each Business Unit holds an annual strategy setting exercise to consider the
Following this, the Group viewed this risk as 'Improving' in the 2022 Annual
organic growth in line with targets shared, particularly as the Group seeks to needs of potential and existing customers, the interests of shareholders, the Report and Accounts, reflecting both the demonstrated success of the strategy
promote a 'customer obsessed' mind-set underpinned by strong retention and competitive landscape and the Group's overall purpose and objectives. to pursue organic and inorganic growth, and the challenging nature of the
consolidation as customers journey to and through retirement.
target set; this view of the level of risk exposure is unchanged.
The Group's Annual Operating Plan commits it to making significant investment
in its Pension & Savings and Retirement Solutions businesses, which will In the first six months of 2023, the Group completed BPA transactions with a
include propositions that are driven by customer insight. combined premium of £3.2 billion. This continues to demonstrate that the
Group has the ability to compete and win in the BPA market.
The Group is established in the Bulk Purchase Annuities ('BPA') market and
continues to invest in its operating model to further strengthen its The Pensions and Savings Business, operating under the Standard Life brand,
capability to support its growth plans. has developed its operating model to centre around three Trading Channels
Workplace, Retail Intermediated and Retail Direct.
For new BPA business, the Group continues to be selective and proportionate,
focusing on value not volume, by applying its rigorous Capital Allocation In Workplace, the Group continues to attract good flows in. The Group
Framework. continues to recruit to increase its capability in terms of proposition and
distribution; 54 new scheme wins have been confirmed in the first six months
of 2023 (compared with 76 for the full year in 2022), and the Group is
actively managing a number of enquiries.
The operating model and organisational design are being developed and
implemented for the Retail businesses, with the aim of maximising
opportunities for growth, both directly with customers and through advisers,
from new and existing customers. During H1 2023, c.£0.5bn of assets were
internally transferred to Retail Direct to enable existing customers to access
modern pension offerings to support them to and through retirement.
The Group is looking to expand the current offering of financial guidance and
advice to support customers in better preparing for their retirement.
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 defines a clear set of prioritisation 1 There has been no change to the assessment of exposure to this risk, which
its significant change agenda which is required to execute the Group's adversely impacted by insufficient resource and capabilities as well as criteria and scheduling principles for new projects. This is to support the
reflects the potential impact of failing to deliver the Group's significant
strategic objectives inefficient prioritisation, scheduling and oversight of projects. The risk safe and controlled mobilisation of new change in line with capacity and risk 2 strategic and regulatory change agenda, since its introduction in the 2020
could materialise within both the Group and its strategic partners. appetite and to strengthen business readiness processes to deliver change
Annual Report and Accounts.
safely into the operations environment. Information setting out the current 3
This could result in the benefits of change not being realised by the Group and forecast levels of resource supply and demand continues to be provided to The Group has continued to strengthen its Change Management Framework during
in the time frame assumed in its business plans and may result in the Group accountable senior management to enable informed decision-making to take 2023 and expects to see an improving trend in this risk as those enhancements
being unable to deliver its strategic objectives. Poor change delivery could place. This aims to ensure that all material risks to project delivery are are seen in project delivery. The Group's Chief Operating Officer, Jackie
affect the Group's ability to operate its core processes in a controlled and appropriately identified, assessed, managed, monitored and reported. Noakes, is driving further enhancements planned for 2023 to evolve and mature
timely manner. the Group's change operating model. These should also have a positive impact
on this risk. However, exposure remains until this work is complete which the
Group expects to be in Q2 2024.
The Group fails to appropriately prepare for and manage the effects The Group is exposed to the risk of failing to respond adequately to Sustainability risk and Climate risks are both embedded into the Group's RMF. 1 There has been no change to the assessment of the overall level of this risk
of climate change and wider ESG risks Environmental, Social and Governance ('ESG') risks and delivering on its
since its introduction in the 2019 Annual Report and Accounts. The Group is
social purpose, for example, failing to meet and make its sustainability Climate risk 'cross-cuts' the Group's Risk Universe. This means the 2 making good progress on integrating the management of climate change and wider
commitments. consideration of material climate-related risks in embedded across the Group's
ESG risks across the business, including in investment portfolios with further
risk policies, with regular reporting undertaken to ensure ongoing visibility 3 work underway to embed fully across the business.
A failure to manage ESG risk could result in adverse customer outcomes, of its exposure to these risks. A specific Sustainability Risk Policy is also
reduced colleague engagement, reduced proposition attractiveness, reputational in place. The external ESG environment is changing rapidly, particularly with new
risks and litigation.
regulation and changing government policies.
The Group is actively integrating the consideration of ESG risks into its
The Group is exposed to risks arising from the transition to a lower-carbon processes, including in its investment decisions. The Group is cognisant of this changing environment and has undertaken several
economy, which could result in a loss in the value of policyholder and
deep dives on emerging ESG risk areas such as Greenwashing risk and ESG
shareholder assets. The Group continues to engage with suppliers and asset managers on their Litigation, and is currently undertaking a deep dive on nature risk in
progress and approach managing climate change and wider ESG risks. investment portfolios. These investigations have increased awareness for
In addition, physical risk can give rise to financial implications, such as
Boards and management of the risks within the business and facilitated control
direct damage to assets, operational impacts either direct or due to supply The Group undertakes annual climate-related stress and scenario testing and improvements where appropriate.
chain disruption, and impacts on policyholder health and wellbeing, impacting continues to build its climate scenario modelling capabilities.
demographic experience.
The successful delivery of the Group's net-zero targets has a dependency on
The Group publishes an annual Sustainability Report and an annual Climate the decarbonisation of the wider economy and evolution of public policy.
Report, the Latter of which is prepared in line with the Task Force on Anti-climate change and ESG sentiment, particularly in high carbon-emitting
Climate-related Financial Disclosures ('TCFD') guidance. countries, could have far reaching consequences for the pace and effectiveness
of climate action and policy changes. This could limit investment
opportunities and make it more difficult for the Group to manage the risk and
meet its climate commitments.
Progress has been made in delivering the Group's Net-Zero and wider
sustainability targets, which continue to be assessed and monitored. The Group
published its inaugural Net-Zero Transition Plan in May 2023.
More information on the Group's sustainability targets and actions can be
found in the 2022 Sustainability Report.
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 1 The FCA's Consumer duty represents a step change in approach for the industry
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.
re-enforcing a shift away from a rules-based regime to principles-based
harm. This could also lead to reputational damage for the Group and/or
2 regulation. The Duty introduces an overarching requirement that firms, and
financial losses. The Group Conduct Strategy, which overarches the Risk Universe and all risk their employees must act to deliver good outcomes for retail customers. In
policies, is designed to detect where customers are at risk of poor outcomes, response, the Group mobilised a programme of work to implement the changes
In addition a failure to deliver propositions that meet the evolving needs of minimise conduct risks, and respond with timely and appropriate mitigating required to achieve its interpretation of compliance in line with the key
customers may result in the Group's failure to deliver its purpose of helping actions. regulatory deadlines of end-April 2023, end-July 203 and end-July 2024.
people secure a life
of possibilities. The Group has a suite of customer policies that set out key customer risks and Despite having met the first two deadlines, the Group's view is that the risk
the Control Objectives that determine the Key Controls required to mitigate exposure around the Duty is currently heightened whilst the supervisory
them. approach matures and closed products are reviewed against the Duty's
principles, most notably fair value, ahead of the 31 July 2024 deadline. The
The Group maintains a strong and open relationship with the FCA and other FCA is "raising the bar" in terms of expectations on firms to ensure and
regulators, particularly on matters involving customer outcomes. evidence good outcomes are being achieved for their customers. While the FCA
is providing guidance to the industry to support firms' plans to embed the
The Group's Proposition Development Process ensures consideration of customer Duty within their businesses, it recognises that it own understanding and
needs and conduct risk when developing propositions. development of guidance and supervisory approach requires ongoing definition
and development.
The Group continues to monitor the impacts of the cost-of-living crisis on its
customers. Proactive action to support customers, including those most
vulnerable, is a priority. The Group is using customer behaviour research and
analysis to provide customers with the support and help that they need. This
has included improving all brand websites to provide general cost-of-living
support, encouraging customers to get in touch for help and including links to
external support websites.
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's Operational Resilience Framework enhances the protection of 1 The strategic risk has been assessed as 'Heightened' in the Group's Annual
to its customers and stakeholders if it cannot maintain the provision of customers and stakeholders. It is designed to prevent intolerable harm and
Report and Accounts since 2020.
important business services when faced with a major operational disruption to supports compliance with the regulations. The Group continues to works closely 2
core IT systems and operations. This could occur either in-house or within the with its outsource partners to ensure that the level of resilience delivered
Key drivers of this assessment are the increasing threat of cyber-attacks and
Group's primary and downstream outsourcers be triggered by a range of is aligned to the Group's impact tolerances. 3 the Group's dependency on its outsource partners to have appropriate
environmental and
resilience to operational disruption.
climatic factors such as the cost-of-living crisis and adverse weather The Group has already taken some action, through previous strategic
phenomena. . transformation activity, to reduce exposure to technological redundancy and The Group has a significant change and customer migration agenda over the next
key person dependency risk, increasing the resilience of its customer service. three to five years effective completion of which is required to deliver
The Group regularly conducts customer migrations as part of transition It continues to do so where further exposure is identified. planned strengthening if its operational resilience both internally and with
activities in delivering against its strategic objectives. In doing so, it
some material outsourced service providers. This exposes the group to
faces the risk of interruption to its customer services, which may result in The Group regularly reviews important business service MI to ensure increased risk. However, this is mitigated through strengthened Operational
the failure to deliver expected customer outcomes. appropriate action is taken to rectify and prevent customer harm. The Group is Resilience and Change Management Frameworks where the risk of late delivery is
working to further strengthen and enhance the overall resilience of the Group actively managed by both the relevant change programme and separate
Regulatory requirements for operational resilience, and a timetable to achieve and its outsource partners by March 2025 through is Operational Resilience operational resilience remediation governance and reporting.
full compliance, were published in March 2021. Whilst the specific Remediation Project.
requirement to work within set impact tolerances takes effect in March 2025,
The quantum of strategic customer transformation activity requires subject
the Group is already exposed to regulatory censure in the event of operational The Group and its outsourced partners have well established business matter expertise to execute successfully. The Group's operational resilience
disruption should the regulator determine that the cause was, fully or in continuity management and disaster recover frameworks that are annually would be impacted by a large-scale loss of colleagues, for example due to
part, a breach of existing regulation. refreshed and regularly tested. Recent disruption events have demonstrate that illness or incapacity such as influenza, in the UK or globally. Such impacts
these are effective. are difficult to mitigate in the short-term, however the Group made
substantial investments in its remote working capability to manage the impacts
The Group is undertaking scenarios for a potential cyber-attack against it or of COVID-19 which would be expected to help mitigate the impacts of a further
its outsourcers. These will identify any material areas in which controls can pandemic to service continuity.
be improved.
The Group actively manages operational capacity and monitors the service
continuity required to deliver its strategy, including transition activities.
Rigorous planning and stress testing are in place to identify and develop
pre-emptive management strategies, should customer migrations impact.
Services.
The Group and its outsource partners have a flexible working model in place.
This helps reduce exposure to intolerable disruption for its customers.
The Group undertakes proactive horizon scanning to understand potential
changes to the regulatory and legislative landscape. This allows the Group to
understand the potential impact of these changes to amend working practices to
meet the new requirements by the deadline.
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 This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
political environment that could impact the quality of customer outcomes, lead to regulatory changes to the regulatory and legislative landscape. This allows the Group to
Accounts due to the uncertainty around Solvency II Reforms and the FCA's
sanction, impact financial performance or cause reputational damage. These understand the potential impact of these changes to amend working practices to 2 proposed Consumer Duty. These, and the significant undertaking to achieve
could require changes to working practices and have an adverse impact on meet the new requirements by the deadline.
compliance with IFRS 17 in 2023, were the key drivers of the assessment of
resources and financial performance. 3 risks as further 'Heightened' from that position in the 2022 Annual Report and
Accounts and the current assessment is unchanged from that position.
Political uncertainty or changes in the government could see changes in
policy that could impact the industry in which the Group operates. The volatile political environment remains 'heightened' due to the economic
headwinds facing the current administration, with implications for the Group's
customer base, including the cost-of-living crisis, increased borrowing costs
and the potential increase in vulnerability.
In June 2023, HMT published draft legislation related to the Solvency II
reforms. The PRA then issued the first of three anticipated consultations to
implement those reforms, with the final consultation expected in Q1 2024. The
final form of these changes and the implementation date will not be known
until the PRA issues a Policy Statement following its final consultation. 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.
These regulations are an important component of the changes needed to the
wider UK investment landscape that will enable the Group to meet its ambition
to invest more in the future. 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 will therefore remain
actively involved in industry lobbying on Solvency II.
As noted above, the FCA's Consumer Duty represents an evolution in regulatory
approach, introducing an overarching requirement that firms and staff must act
to deliver good outcomes for retail customers. The Group views the Duty as
well aligned to its strategic priority of helping people secure a life of
possibilities and, from 31 July 2023, the Group is materially compliant with
the Duty for its open products. However, as the FCA is "raising the bar" in
terms of expectations on firms to ensure and evidence good outcomes are being
achieved for their customers and the Group's view is that the risk exposure
around the Duty is currently heightened. Focus remains on reviewing customer
journeys for closed products in order to make any updates needed to achieve
compliance with the Duty's principles for these products ahead of the 31 July
2024 deadline, with the Board and FCA being regularly updated on the
programme.
IFRS 17 aims to standardise insurance accounting across the industry and
achieving compliance with for the Group's 2023 interim accounts has been a
significant undertaking. The Group will continue its finance transformation
programme beyond the 2023 interim accounts to further streamline and automate
IFRS 17 processes to support efficient financial reporting in the future.
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 This risk was assessed as 'Heightened' in the Group's 2022 Annual Report and
increased interest from cyber criminals and a greater risk of cyber-attack detection and response processes, identifying weaknesses through ongoing
Accounts due to the continuing conflict in Ukraine and this remains the key
which could have significant impact on customer outcomes, strategic assessment and review. 3 driver for the assessment of the exposure to this risk, which remains
objectives, regulatory obligations and the Group's reputation and brand.
unchanged. Cyber threat levels remain high with increased likelihood of a
The Information/Cyber Security Strategy includes a continuous Information cyber-attack from a State actor; this would most likely be against the UK's
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 Critical National Infrastructure, particularly on supply chains and the wider
breach remains high and the complexity of the Group's increasingly Annual Cyber Risk Assessment and Annual Cyber Threat Assessment that utilises Financial Services industry that the Group relies upon.
interconnected digital ecosystem exposes it to multiple attack vectors. These external threat intelligence sources.
include phishing and business email compromise, hacking, data breach and
On 19 April 2023, the UK's National Cyber Security Centre issued an alert
supply chain compromise. The Group continues to consolidate its cyber security tools and capabilities. warning of a heightened risk from attach by state-aligned Russian hacktivists,
The Enterprise Information Security Strategy 2023-2025 includes delivery of a urging all organisations in the country to apply recommended security
Increased use of online functionality to meet customer preferences and Group Identity Platform and Zero Trust model, Supplier Assurance Platform, measures. Figures reveal that 33% of all UK Businesses have suffered a
flexible ways of working, including remote access to business systems, Secure Cloud Adoption and proactive Data Loss Prevention. Cyber-attack in the 12 months up to March.
adds additional challenges to cyber resilience and could impact service
The specialist Line 2 Information Security & Cyber Risk team provides
provision and customer security. independent oversight and challenge of information security controls; The Group's cyber controls are designed and maintained to repel the full range
identifying trends, internal and external threats and advising on appropriate of the cyber-attack scenarios; although the Group's main threat is considered
mitigation solutions. to be Cyber Crime, from Individuals or Organised Crime Groups, the same
controls are utilised to defend against a Nation-State level cyber-attack.
The Group continues to enhance and strengthen its outsourced service provider
and third party oversight and assurance processes. Regular Board, Executive, A single consolidated Group Supplier Information Security Framework has been
Risk and Audit Committee engagement occurs within the Group. delivered which is improving the Security Oversight and Assurance of Phoenix's
large portfolio of OSPs 3(rd) and 4(th) Party Suppliers. Further embedding and
The Group holds ISO 27001 Information Security Management Certification for maturing over the next 12 months will help mitigate the risks associated with
its Workforce Pension and Benefits schemes, which provides confidence to both Supply Chain Cyber Security, which is recognised as one of Phoenix's key Cyber
clients/internal stakeholders that it is committed to managing security. Security threats.
Vulnerability Management continues to mature with the Enterprise Cyber
Exposure Score (CES) continuing to drop and is now at 401, which is
significant reduction from 700+ just over a year ago. This score is firmly
within an Amber rating and is steadily approaching a targeted Green rating,
which is a score below 350.
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 The Group aims to attract and retain colleagues, building a sense of belonging 1 There has been no change to the overall level of exposure to this risk since
the skills needed to deliver its strategy engaged workforce. by providing timely communications to colleagues that aim to provide clarity
it was introduced in the 2018 Annual Report and Accounts. This is driven
and support employee engagement for corporate activities, including details of 2 by acknowledgement of the significant amount of integration activity within
This risk is inherent in the Group's business model given the nature of key milestones to deliver against the Group's plans.
the Group and uncertainty regarding the longer-term social and marketplace
acquisition activity and specialist skill sets.
3 impacts of the pandemic and cost-of-living crisis on colleague attrition and
In addition, the Group regularly benchmarks terms and conditions against sickness, motivation and engagement. Skills essential to the Group continue to
Potential areas of uncertainty include: the ongoing transition of ReAssure the market and maintains succession plans for key individuals, ensuring be in high-demand in the wider marketplace. The Group monitors this closely
businesses into the Group, the expanded strategic partnership with TCS and the successors bring appropriate diversity of thought, background and experience. and continues to remain confident in the attractiveness of its colleague
introduction of the flexible working model. Every six months, the Group's CEO and HR Director meet with the Executive proposition.
Committee to discuss talent, succession and diversity.
Potential periods of uncertainty could result in a loss of critical corporate
The Group continues to leverage apprenticeships to support workforce diversity
knowledge, unplanned departures of key individuals, or the failure to attract Monthly colleague surveys help to improve engagement whilst promoting and to fill key skills, creating bespoke graduate and early careers programmes
and retain individuals with the appropriate skills to help deliver the Group's continuous listening and rapid identification of concerns and actions. for specialist technical areas.
strategy.
The Group continues actively to manage operational capacity required to The Group continues to operate successfully a flexible working model, with
This could ultimately impact the Group's operational capability, its customer deliver its strategy with ongoing focus on senior bandwidth, attrition and strategic investments in technology and other resources maximising its
relationship and financial performance. sickness. effectiveness. The model focuses on empowerment by enabling leaders and
colleagues to agree working arrangements that meet individual, team and
Flexible working offers colleagues greater flexibility in their working business needs.
practices.
The increased scale and presence of the Group, and success in multi-site and
The Group looks to respond proactively to external social, economic and remote working, gives greater access to a larger talent pool to attract and
marketplace events that impact colleagues. retain in the future. In addition, the Group's Graduate Programmes helps to
support the talent pipeline.
MARKET RISK
Adverse investment market movements or broader economic forces can impact the 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 This risk was assessed as 'Heightened' in the Group's 2019 Annual Report and
Group's ability to meet its cash flow targets, along with the potential to movements. This can impact the Group's capital, solvency, profitability and exposure, including limits in each asset class, cash flow forecasting and
Accounts and then again in 2020 due to ongoing economic uncertainty,
negatively impact customer investments or sentiment 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 geopolitical tensions, the impacts of COVID-19 and uncertainty around interest
future cash flows and long-term investment performance for shareholders and to residential property and private investments, as a result of its BPA
rates/ These remain the key drivers for the current assessment of exposure to
customers. investment strategy, is actively monitored. 3 this risk, which is unchanged from the 2020 position.
There are a number of drivers for market movements including government and The Group continues to implement de-risking strategies and control The global macro-economic environment remains highly uncertain, as it did
central bank policies, geopolitical events, market sentiment, sector specific enhancements to mitigate unwanted customer and shareholder outcomes from throughout 2022, driven in part by the Ukraine conflict and rapid increase in
sentiment, global pandemics and financial risks of climate change, including certain market movements, such as equities, interest rates, inflation and inflation. The longer-term impacts of the conflict have affected the cost and
risks from the transition to a low carbon economy. foreign currencies. availability of food and vital commodities, such as oil and gas, driving
inflationary pressures. Inflation continues to be considered a material short
The Group maintains cash buffers in its holding companies and has access to a to medium-term risk, with the UK Consumer Price Index remaining persistently
credit facility to reduce reliance on emerging cash flows. high.
The Group closely monitors and manages its excess capital position and it The Bank of England base rate has increased from 0.1% in December 2021 to
regularly discussed market outlook with its asset managers. 5.25%, with further rate rises expected during the remainder of 2023 and
perhaps into 2024. Higher interest rates, coupled with cost-of-living rises,
are beginning to suppress residential property prices. Interest rate rises are
also expected to exacerbate the cost-of-living crisis as large numbers of
fixed-term mortgages come from renewal over the next 12 months.
UK gilt yields remain high, rivalling the levels seen during the 2022
mini-budget market event. This is coupled with high swap rates, constraining
liquidity in the long-term savings sector.
The Group continues to monitor and 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 in the event of unanticipated market movements such as
those following the mini-budget.
As noted above, work is underway across the Group to ensure customers are
supported as the impacts of the cost-of-living crisis continue to crystallise.
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 This risk was assessed as 'Heightened' in the 2020 Annual Report and remains
line with expectations sensitive to future longevity, persistency and mortality rates. For example, checks to identify any trends or variances in assumptions.
'Heightened'. The assessment is driven by continued uncertainty around future
if annuity policyholders live for longer than expected, then the Group will
2 demographic experience driven primarily by the long-term effects of COVID-19
need to pay their benefits for longer. The Group regularly reviews assumptions to reflect the continued trend of on life expectancy, potential health risks from rising NHS waiting times; the
reductions in future mortality improvements. rise in long-term sickness rates observed across the UK workforce; and health
The amount of additional capital required to meet additional liabilities could
and customer behaviour implications from the 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 business. The Group continues to monitor customer behaviour as a result of the cost of
living crisis to ensure its impact on demographic assumptions is appropriately
Where required, the reflected in regular assumption reviews. As noted elsewhere in this section,
Group continues to take capital management actions to mitigate adverse work is underway to continue to ensure support is provided to customers as the
demographic experience. impacts from the cost of living crisis continue to materialise.
The Group has completed BPA transactions with a combined premium of £3.2
billion in the first six months of 2023. 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 In the Group's 2020 Annual Report and Accounts this risk was assessed as
counterparty creditworthiness or default of investment, reinsurance, derivatives or banking limits in place relating to individual counterparties (with sub-limits for
'Heightened' as a result of the market volatility and wider economic and
counterparties. This could cause immediate financial loss, or a reduction in each credit risk exposure) sector concentration and geographies. 2 social impacts arising from COVID-19. While the residual risks from COVID-19
future profits.
have receded, the current assessment of the level of exposure to this risk is
The Group undertakes regular stress and scenario testing of the credit 3 unchanged from the 2020 position, driven by ongoing geopolitical tensions,
The Group is also exposed to trading counterparties, such as reinsurers or portfolio. Where possible, exposures are diversified using a range of
economic uncertainty and persistent high inflation.
service providers failing to meet all or part of their obligations. This would counterparty providers. All material reinsurance and derivative positions are
negatively impact the Group's operations that may in turn have adverse effects appropriately collateralised. Over 2023 the Group continued to undertake actions to increase the overall
on customer relationships and may lead to financial loss.
credit quality of its portfolio and mitigate the impact on risk capital of
The Group regularly discusses market outlook with its asset managers in future downgrades This positive progress is balanced by risks arising from the
addition to the Line 2 Risk oversight provided. Ukraine conflict and supply chain risks including the risk of deterioration in
the relationship between the USA and China. Uncertainties over the global
For mitigation of risks associated with stock-lending, additional protection economic outlook and persistent high inflation present an increased risks of
is provided through collateral indemnity insurance. defaults and downgrades. However, a UK sovereign downgrade is now less
probably than at the end of 2022, especially following Standard and Poor's
revision of the outlook from 'negative' to 'stable' for the UK's credit rating
in April 2023. This has a positive impact on UK-related assets including
Gilts, Housing Associations and Local Authority Loans.
Despite the failure of a number of US regional banks and a
regulator-facilitated merger of Credit Suisse with UBS in early 2023, the
Group's view is that a full-blown banking crisis will not follow. In addition,
the Group has limited exposure to banks with idiosyncratic risks.
The Group has no direct shareholder credit exposure to Russia or Ukraine and
no exposure to sanctioned entities.
The Group continues to increase investment in illiquid credit assets as a
result of BPA transactions. This is within appetite and in line with the
Group's strategic asset allocations plans. The growth in illiquid assets will
be met by growth in the overall 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. Two examples of key risks and opportunities
discussed by senior management and the Board during 2023 are:
Risk Title Description Risk Universe Category
Generative AI Generative Artificial Intelligence (AI) refers to deep-learning models that Operational
can generate high-quality text, images, and other content based on the data
used to train them. Generative AI presents both a threat and opportunity, and
the Group's priority is to establish pre-emptively the policy guardrails and
controls that are essential to setting expectations on the safe use of
Generative AI.
The widespread use of Generative AI and its systemic vulnerabilities raise
concerns that adversarial machine-learning could lead to risk / loss
accumulation. For example, attackers could use adversarial machine learning to
produce patterns that mislead machine-learning systems and are difficult for
humans to notice. Fraudsters might target the machine learning systems used
for product distribution and pricing, leading to unwanted shifts in risk
exposure. Public reports of hacks / adversarial machine learning attacks could
cause reputational damage. Currently issues exist when it comes to training
the AI, as with Generative A I the data is not always current and tools may be
drawing on sources that are months or years out of date impacting accuracy.
Limitations of Generative AI models, such as being unable to perform tasks
that require reasoning, logical thinking and empathy could lead to unrealistic
responses.
However, Generative AI could spark a productivity boom that could eventually
raise annual global GDP by 7% over 10 years (Goldman Sachs). This could result
from future opportunities to provide automated customer service, help analyse
large amounts of unstructured data to identify potential risks informing
underwriting decisions, process large amounts of text data, help identify
patterns and anomalies that may indicate fraudulent activity, generate
customer communications, and enable multi-lingual customer service.
Pension Pausers According to latest research from Canada Life, one in twenty UK adults (5%) Customer
say they have stopped contributing into their company pension due to the
cost-of-living crisis. A further 6% say they are actively thinking about
pausing their pension contributions, with the ending of more fixed rate
mortgages increasing the pressure to do so. 19% of pension schemes surveyed by
the PLSA have seen savers asking about reducing or stopping their pension
contributions, with a 17% wanting early access to their pension after age 55.
The survey also showed that almost half of pension schemes (45%) expect more
savers might want to reduce pension contributions in the next six months and
around one in three are also expecting members to want to have early access to
their pension after age 55 (34%).
In May 2023, the Group identified some small changes in customer behaviour
including an increase in lapses in ReAssure, premium holiday requests and
drawdown in Phoenix, and interactions across the support hub in Standard Life.
The Group continues to signpost additional information and support to
customers.
As well as the easements the Group made to some products as the UK went into
lockdown, the Group is also considering additional flexibility across its
product range, such as:
· small annuity encashment which allows exchange of small annuities for a
lump sum;
· premium flexibility and deferral which will help customers to understand
and utilise the flexible contractual features of their products, for example
non-forfeiture, 'kept in force' periods or premium waiver; and
maintaining benefits through a contribution holiday, where some Contribution
Protection and Death-in-Service Benefits remain when a payment holiday is
taken.
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 2023, 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
2023 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
27 September 2023
Phoenix Group Holdings plc Board of Directors
Chair
Alastair Barbour
Executive Directors
Andy Briggs
Rakesh Thakrar
Non-Executive Directors
Karen Green
Mark Gregory
Hiroyuki Iioka
Katie Murray
John Pollock
Belinda Richards
David Scott
Margaret Semple
Nicholas Shott
Independent auditor's review report
To: 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 2023 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 2023 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" (ISRE) 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
this ISRE, 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
27 September 2023
Condensed consolidated income statement
For year the half year ended 30 June 2023
Notes Half year ended 30 June 2023 Half year ended 30 June 2022 restated(1)
£m £m
Insurance revenue 6 2,902 2,615
Insurance service expenses (2,640) (2,709)
Insurance service result before reinsurance contracts 262 (94)
Net expenses from reinsurance contracts (120) (80)
Insurance service result 142 (174)
Fees and commissions 422 438
Net investment income 5,087 (31,602)
Other operating income 84 15
Gain on acquisition 3.1 66 -
Total income 5,801 (31,323)
Net finance (expense)/income from insurance contracts (423) 16,114
Net finance expense from reinsurance contracts (139) (621)
Net insurance finance (expense)/income (562) 15,493
Change in investment contract liabilities (4,515) 14,304
Amortisation and impairment of acquired in-force business (158) (172)
Amortisation of other intangibles (3) (3)
Administrative expenses (759) (709)
Net (expense)/income attributable to unit holders (42) 379
Loss before finance costs and tax (238) (2,031)
Finance costs (134) (116)
Loss for the period before tax (372) (2,147)
Tax (charge)/credit attributable to policyholders' returns 7 (65) 468
Loss before the tax attributable to owners (437) 1,679)
Tax credit 7 127 889
Add: tax attributable to policyholders' returns 7 5 468)
Tax credit attributable to owners 7 192 421
Loss for the period attributable to owners (245) (1,258)
Attributable to:
Owners of the parent (261) (1,289)
on-controlling interests 12 16 31
(245) (1,258)
Earnings per ordinary share
Basic (pence per share) 8 (27.1)p (130.4)p
Diluted (pence per share) 8 (27.1)p (130.4)p
(1) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details).
Condensed statement of consolidated comprehensive income
For the half year ended 30 June 2023
Notes Half year ended 30 June 2023 Half year ended
£m 30 June 2022
restated(1)
£m
Loss for the period (245) (1,258)
Other comprehensive (expense)/income:
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value (losses)/gains arising during the period (45) 130
Reclassification adjustments for amounts recognised in profit or loss 81 (158)
Exchange differences on translating foreign operations 17 (12)
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability 39 648
Tax charge relating to other comprehensive income items 7 (21) (155)
Total other comprehensive income for the period 71 453
Total comprehensive expense for the period (174) (805)
Attributable to:
Owners of the parent (190) (836)
Non-controlling interests 12 16 31
(174) (805)
(1) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details).
Condensed statement of consolidated financial position
As at 30 June 2023
Notes 30 June 2023 31 December 2022
£m restated(1)
£m
Assets
Pension scheme asset 13 28 14
Reimbursement Rights 13 203 205
Intangible assets
Goodwill 10 10
Acquired in-force business 2,049 2,177
Other intangibles 109 112
2,168 2,299
Property, plant and equipment 114 125
Investment property 3,904 3,727
Financial assets
Loans and deposits 215 268
Derivatives 3,278 4,068
Equities 87,022 76,737
Investment in associate 273 329
Debt securities 85,794 83,116
Collective investment schemes 71,603 75,389
Reinsurers' share of investment contract liabilities 9,141 9,065
16 257,326 248,972
Insurance assets
Insurance contract assets 14 47 48
Reinsurance contract assets 14 4,059 4,071
4,106 4,119
Deferred tax assets 145 158
Current tax 509 519
Prepayments and accrued income 547 403
Other receivables 4,856 4,455
Cash and cash equivalents 8,055 8,839
Assets classified as held for sale 3.2 6,830 7,205
Total assets 288,791 281,040
Notes 30 June 2023 31 December 2022
restated(1
£m ) £m
Equity and liabilities
Equity attributable to owners of the parent
Share capital 10 100 100
Share premium 14 10
Shares held by employee benefit trust (12) (13)
Foreign currency translation reserve 104 87
Merger relief reserve 1,819 1,819
Other reserves 11 82 46
Retained earnings 649 1,162
Total equity attributable to owners of the parent 2,756 3,211
Tier 1 Notes 494 494
Non-controlling interests 12 543 532
Total equity 3,793 4,237
Liabilities
Pension scheme liability 13 2,464 2,520
Insurance liabilities
Insurance contract liabilities 14 110,591 107,608
Reinsurance contract liabilities 14 - 7
110,591 107,615
Financial liabilities
Investment contracts 147,516 141,169
Borrowings 15 3,919 3,980
Derivatives 4,727 5,875
Net asset value attributable to unit holders 2,965 3,042
Obligations for repayment of collateral received 973 1,706
160,100 155,772
Provisions 137 184
Deferred tax liabilities 102 309
Current tax 37 34
Lease liabilities 81 92
Accruals and deferred income 545 544
Other payables 3,073 1,373
Liabilities classified as held for sale 3.2 7,868 8,360
Total liabilities 284,998 276,803
Total equity and liabilities 288,791 281,040
(1) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details).
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2023
Share capital (note 10) £m Share premium Shares held by the employee benefit trust Foreign currency translation reserve Merger relief reserve Other reserves (note 11) Retained earnings Total Tier 1 Notes Non-controlling interests (note 12) £m Total equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2023 100 10 (13) 87 1,819 46 1,162 3,211 494 532 4,237
(Loss)/profit for the period - - - - - - (261) (261) - 16 (245)
Other comprehensive income for the period - - - 17 - 36 18 71 - - 71
Total comprehensive income/(expense) for the period - - - 17 - 36 (243) (190) - 16 (174)
Issue of ordinary share capital, net of associated commissions and expenses - 4 - - - - - 4 - - 4
Dividends paid on ordinary shares - - - - - - (260) (260) - - (260)
Dividends paid to non-controlling interests - - - - - - - - - (5) (5)
Credit to equity for equity-settled share-based payments - - - - - - 10 10 - - 10
Shares distributed by the employee benefit trust - - 9 - - - (9) - - - -
Shares acquired by the employee benefit trust - - (8) - - - - (8) - - (8)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (11) (11) - - (11)
At 30 June 2023 100 14 (12) 104 1,819 82 649 2,756 494 543 3,793
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2022
Share capital (note 11) £m Share premium £m Shares held by the employee benefit trust Foreign currency translation reserve Merger relief reserve £m Other reserves (note 11) Retained earnings £m Total Tier 1 Notes Non-controlling interests (note 12) £m Total equity
£m
£m
£m
£m
£m £m
At 1 January 2022 (restated) 100 6 (12) 55 1,819 56 3,743 5,767 494 460 6,721
(Loss)/profit for the period - - - - - - (1,289) (1,289) - 31 (1,258)
Other comprehensive (expense)/income for the period - - - (12) - (28) 493 453 - - 453
Total comprehensive (expense)/income for the period - - - (12) - (28) (796) (836) - 31 (805)
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 (restated) 100 8 (13) 43 1,819 28 2,686 4,671 494 486 5,651
(1) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details).
Condensed statement of consolidated
cash flows
For the half year ended 30 June 2023
Notes Half year ended Half year ended
30 June 2023 30 June 2022
£m £m
Cash flows from operating activities
Cash (utilised)/generated by operations 17 (262) 2,128
Taxation paid (47) (138)
Net cash flows from operating activities (309) 1,990
Cash flows from investing activities
Acquisition of SLF of Canada UK Limited, net of cash acquired 3.1 (20) -
Net cash flows from investing activities (20) -
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and 4 2
expenses
Ordinary share dividends paid 9 (260) (248)
Dividends paid to non-controlling interests 12 (5) (5)
Repayment of policyholder borrowings (22) (23)
Repayment of lease liabilities (6) (7)
Proceeds from new policyholder borrowings, net of associated expenses 50 37
Coupon paid on Tier 1 Notes (14) (14)
Interest paid on policyholder borrowings (1) -
Interest paid on shareholder borrowings (114) (119)
Net cash flows from financing activities (368) (377)
Net (decrease)/increase in cash and cash equivalents (697) 1,613
Cash and cash equivalents at the beginning of the period (before 8,839 9,188
reclassification of cash and cash equivalents held for sale)
Less: cash and cash equivalents of operations classified as held for sale 3.2 (87) (63)
Cash and cash equivalents at the end of the period 8,055 10,738
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 2023 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 31
to 85 and were authorised by the Board of Directors for issue on 27 September
2023.
These condensed consolidated interim financial statements are unaudited but
have been reviewed by the Group's auditor, Ernst & Young LLP. The
comparative results for the year ended 31 December 2022 and 30 June 2022 have
been taken from the Group's 2022 Annual Report and Accounts and the 2022
Interim Financial Statements respectively, except for certain balances which
have been restated but not audited following the implementation of IFRS 17
Insurance Contracts and IFRS 9 Financial Instruments (see notes 2.1 and 2.2).
They should be read in conjunction with the audited consolidated financial
statements of the Group for the year ended 31 December 2022.
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 2022 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.
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 2022 consolidated financial statements, with the exception of the new
accounting policies applied following the adoption of the new accounting
standards effective in the period. In preparing the interim financial
statements the Group has adopted the following standards and amendments
effective from 1 January 2023 and which have been endorsed by the UK
Endorsement Board ('UKEB'):
· IFRS 17 Insurance Contracts ;
· IFRS 9 Financial Instruments;
· Disclosure of Accounting Policies (Amendments to IAS 1 Presentation
of Financial Statements and IFRS Practice Statement 2 Making Materiality
Judgments);
· Definition of Accounting Estimates (Amendments to IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors); and
· Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12 Income Taxes).
The nature and impact of the adoption of IFRS 17 and IFRS 9 are disclosed in
note 2. The remaining amendments to standards are not considered to have a
material effect on these interim financial statements.
In preparing the interim financial statements the Group has adopted
International Tax Reform-Pillar Two Model Rules (Amendments to IAS 12) with
effect from 23 May 2023. The Group confirms that it has applied the exception
set out in paragraph 4A in respect of recognising and disclosing information
about deferred tax assets and liabilities related to Pillar Two income taxes.
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 31 December 2024, which
demonstrate the ability of the Group to withstand market shocks in a range of
reasonably foreseeable stress scenarios. These stress scenarios include a
recessionary economic stress scenario reflecting economic downturn affecting a
number of risk exposures including additional credit downgrades, increasing
interest rates and falling equity and property values. 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. In addition, the
Board noted the Group's access to additional funding through its undrawn
£1.75 billion Revolving Credit Facility. The stresses do not give rise to any
material uncertainties over the Group's ability to continue as a going
concern.
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. Adoption of new accounting standards during the period
The Group has applied the requirements of IFRS 17 Insurance Contracts and IFRS
9 Financial Instruments for the first time in the interim financial
statements, including any consequential amendments to other standards. The
nature and effects of the key changes in the Group's accounting policies
resulting from its adoption of IFRS 17 and IFRS 9 are summarised below.
The revised accounting policies applicable from 1 January 2023 are provided
for IFRS 17 in note 2.1.3 and for IFRS 9 in note 2.2.4.
2.1 Adoption of IFRS 17 Insurance Contracts
The Group has adopted IFRS 17 effective from 1 January 2023 and comparative
information for 2022 has been retrospectively restated. IFRS 17 replaces IFRS
4 Insurance Contracts and significantly changes the way the Group recognises,
measures, presents and discloses its insurance contracts, investment contracts
with discretionary participation features ('DPF') and reinsurance contracts
held. It introduces a model that measures groups of contracts based on the
present value of future cash flows with an explicit risk adjustment for
non-financial risk and a contractual service margin ('CSM'), representing the
unearned profit to be recognised in profit or loss over the coverage period.
In June 2022, the IFRS Interpretations Committee ('IFRIC') provided its final
agenda decision on the 'Transfer of Insurance Coverage under a Group of
Annuity Contracts - IFRS 17', a non-objection from the International
Accounting Standards Board was provided in July 2022. The methodology for
coverage units determined by the Group and set out in the 'Coverage units'
section below is compliant with this IFRIC final agenda decision.
2.1.1 Transition approach
Changes in accounting policies resulting from the adoption of IFRS 17 have
been applied using a Full Retrospective Approach ('FRA') to the extent
practicable and using a Fair Value Approach ('FVA') approach where the FRA was
considered impracticable. The full retrospective approach requires the Group
to:
· identify, recognise and measure each group of insurance and
reinsurance contracts as if IFRS 17 had always applied;
· derecognise any existing balances that would not exist had IFRS 17
always applied; and
· recognise any resulting net difference in equity.
In determining whether it was practicable for the FRA transition method to be
applied, the Group has considered the following key factors:
· the ability to obtain assumptions and data at the required level of
granularity, without the material use of hindsight, particularly in relation
to contracts within acquired businesses and where the Group's financial
reporting metrics did not require such information;
· the availability and usability of historic data given the significant
integration work performed by the Group on both its policy administration and
actuarial modelling systems where re-platforming from legacy systems onto a
unified platform has been carried out; and
· the significant level of regulatory change experienced by the
insurance industry, such as Solvency II, which impacts on the level of change
undertaken on both legacy and current policy administration and actuarial
modelling systems.
The FRA has been applied to the following insurance business on transition to
IFRS 17:
· bulk purchase annuities;
· annuities and unit-linked policies that originated from 1 January
2021 onwards for the acquired Standard Life Assurance business entities;
· SunLife policies that originated post 1 January 2018; and
· ReAssure Assurance Limited annuities and non-profit policies from
acquisition date of the ReAssure entities.
The FVA has been applied to the Group's remaining insurance business. On
transition, 58% of the CSM (net of reinsurance) is calculated under the FRA
and 42% under the FVA. However, of the business transitioned under FRA a
significant amount of the CSM relates to the ReAssure business acquired in
2020 and fair valued at that date. Management therefore considers c.95% of
the liabilities, equating to c.84% of the CSM, to be a more accurate
reflection of the use of the FVA.
In applying the FVA, the CSM (or loss component) has been determined at 1
January 2022 as the difference between the fair value of a group of contracts
and the present value of expected future cash flows including acquisition
costs, plus an explicit risk adjustment. In determining the fair value, the
Group has applied the requirements of IFRS 13 Fair Value Measurement, except
for the demand deposit floor requirement, as required by IFRS 17. The fair
value determined by the Group uses cash flows with contract boundaries
consistent with IFRS 17 requirements. The measurement of the fair value of
contracts includes items taken into consideration by a market participant but
which are not included in the IFRS 17 measurement of contracts, such as a risk
premium to reflect a market participant's view of uncertainty inherent in the
contract cash flows being valued and a profit margin. Significant judgements
and estimates used in determining the fair value have been set out in note
2.1.4.
The fair value for the groups of with-profit contracts, has been determined at
transition date as the sum of the best estimate liability ('BEL'); the
policyholders' share of the estate; a risk premium; and other fair value
adjustments, i.e. profits on annuities vesting into the non-profit fund.
The treatment for reinsurance contracts held at transition is similar to that
for insurance contracts with a few exceptions. Reinsurance BEL are calculated
using the IFRS 17 discounted probability-weighted expected present value of
the cash flows on transition date. The cash flows under the reinsurance
contract are stressed in order to calculate the risk premium, plus an
adjustment is made for risk of reinsurer default (i.e. additional risk of
claims received being lower than the best estimate) in the risk premium.
2.1.2 Impact of transition
Total equity attributable to owners of the parent
The Group has determined the quantitative impact of moving to IFRS 17 on 1
January 2022 to be a decrease in the total equity attributable to owners of
the parent of £48 million, from £5,815 million to £5,767 million. The main
drivers of this reduction are:
£m
De-recognition of intangible assets related to contracts measured under IFRS (2,030)
17
Remeasurement of insurance contract liabilities (net of reinsurance) 5,481
Recognition of a risk adjustment (net of reinsurance) (1,061)
Recognition of a contractual service margin (net of reinsurance) (2,430)
Changes in deferred tax from the above items (8)
Change in total equity attributable to owners of the parent (48)
On adoption of IFRS 17, the acquired in force business ('AVIF') and other
intangibles associated with the acquisition of insurance contracts are no
longer held as separate intangible assets and instead included implicitly in
the measurement of insurance contract assets and liabilities.
The remeasurement of insurance contract liabilities primarily includes the
following items:
· removal of IFRS 4 margins as IFRS 17 requires cash flows to be
measured on a best estimate basis with the addition of an explicit adjustment
for risk;
· inclusion of future shareholder profits from with-profit and
unit-linked business that are not fully recognised under IFRS 4; and
· changes in the discount rate, most materially impacting annuity
contracts.
Loss attributable to owners for the half year ended 30 June 2022
As a result of adopting IFRS 17, the loss after tax attributable to owners for
the half year ended 30 June 2022 increased by £382 million from a loss of
£876 million to a loss of £1,258 million.
As previously reported Restated Change
£m £m £m
Adjusted operating profit before tax 507 254 (253)
Economic variances (1,076) (1,540) (464)
Amortisation and impairment of acquired in-force business (248) (172) 76
Amortisation and impairment of other intangibles (10) (3) 7
Other non-operating items (280) (146) 134
Finance costs attributable to owners (103) (103) -
Loss before tax attributable to owners of the parent (1,210) (1,710) (500)
Profit before tax attributable to non-controlling interest 31 31 -
Loss before tax attributable to owners (1,179) (1,679) (500)
Tax credit attributable to owners 303 421 118
Loss after tax attributable to owners (876) (1,258) (382)
Details of the adjusted operating profit methodology following the transition
to IFRS 17 is set out in note 4.
The main drivers of this reduction are:
· the reduction in adjusted operating profit is driven by the change in
profit recognition pattern, under IFRS 17 profits are spread over the life of
contracts as service is provided. This includes the deferral of new business
profits from annuity contracts written in the period;
· Economic variances have increased in relation to the Solvency II
hedging in place. The interest rate sensitive liabilities reduce compared to
IFRS 4 as the majority of the Group's CSM uses locked-in discount rates
resulting in a higher level of 'over-hedging'. In addition, the offset to the
losses primarily from interest rate hedging from gains arising on equity
hedges in the previously reported numbers is reduced as under IFRS 17 these
hedges now partially offset adverse market impacts arising in the income
statement from unit-linked and with-profit business which have a loss
component;
· a reduction in amortisation of acquired in-force business ('AVIF') as
the element of AVIF associated with insurance contracts is derecognised on
transition to IFRS 17; and
· Other non-operating items have reduced due to costs that have been
assessed as directly attributable to insurance contracts being included in the
calculation of the CSM.
2.1.3 New accounting policies
2.1.3.1 Classification
Contracts under which the Group accepts significant insurance risk are
classified as insurance contracts. Contracts held by the Group under which it
transfers significant insurance risk related to underlying insurance contracts
are classified as reinsurance contracts. Some contracts entered into by the
Group have the legal form of insurance contracts but do not transfer
significant insurance risk and expose the Group to financial risk. These
contracts are classified as financial liabilities and are referred to as
investment contracts.
All references in these accounting policies to insurance contracts and
reinsurance contracts include contracts issued, initiated or acquired by the
Group, unless otherwise stated.
Insurance contracts are classified as direct participating contracts or
contracts without direct participation features. Direct participating
contracts are contracts for which, at inception:
· the contractual terms specify that the policyholder participates in a
share of a clearly identified pool of underlying items;
· the Group expects to pay to the policyholder an amount equal to a
substantial share of the fair value returns on the underlying items; and
· the Group expects a substantial proportion of any change in the
amounts to be paid to the policyholder to vary with the change in fair value
of the underlying items.
All other insurance contracts and all reinsurance contracts are classified as
contracts without direct participation features.
Some investment contracts issued by the Group contain discretionary
participation features ('DPF'), whereby the investor has the right and is
expected to receive, as a supplement to the amount not subject to the Group's
discretion, potentially significant additional benefits based on the return of
specified pools of investment assets. The Group accounts for these contracts
under IFRS 17 consistent with insurance contracts.
The classification assessment is made at the date of inception or for business
combinations or portfolio transfers, as at the date of acquisition. Once a
contract is assessed as insurance, investment with DPF or reinsurance, the
classification continues until the contract is derecognised or modified.
When considering classification, and applying the provisions of IFRS 17, the
Group identifies a contract as the smallest unit of account. The Group also
makes an evaluation of whether a series of contracts can be treated together
in applying IFRS 17 based on reasonable and supportable information, or
whether a single contract contains components that need to be separated and
treated as if they were stand-alone contracts.
2.1.3.2 Accounting treatment
Separating components from insurance and reinsurance contracts
The Group assesses its insurance products to determine whether they contain
components, which must be accounted for under accounting standards other than
IFRS 17 (distinct non-insurance components).
Where an insurance contract has a distinct investment component and meets the
separation criteria established under IFRS 17, the investment component is
separated from the host contract and accounted for under IFRS 9. The
assessment of whether a contract has a distinct investment component is
carried out at inception of the contract, or the date of acquisition in the
case of a business combination.
When assessing whether the investment component is distinct, the Group
considers the following, which may indicate that the insurance and investment
component are highly interrelated:
· the value of one component varies with the other component;
· existence of an option to switch between the different components;
· discounts that span both elements e.g. a reduced asset management
charge based on total size of contract; and
· other interacting features e.g. insurance risk from premium waivers
and return of premium covering both elements of the policy.
After separating any distinct components, the Group applies the requirements
of IFRS 17 to all remaining components of the insurance contract or where
distinct criteria are not met, the whole contract is accounted for within IFRS
17.
Level of aggregation
The Group is required to divide its business into groups for the purposes of
recognition and measurement. The Group's business is firstly split into
portfolios. Portfolios contain groups of contracts with similar risks, which
are managed together. Portfolios are further divided based on expected
profitability at inception into three categories: onerous contracts, contracts
that are profitable at initial recognition and have no significant risk of
becoming onerous, and the remaining profitable contracts. For reinsurance
contracts the same three groups would be identified with 'onerous' being
replaced with 'net gain' and 'profitable' being replaced with 'net cost'.
Contracts which are issued more than one year apart are not permitted to be
included within the same group. However as permitted by IFRS 17, the groups of
contracts for which the FVA has been adopted on transition include contracts
issued more than one year apart.
The Group has defined portfolios of insurance and reinsurance contracts issued
broadly based on the predominant risks inherent in the products/contracts, for
example, longevity, persistency, mortality, and by considering whether groups
of products are managed together. These portfolios are further split by legal
entity, with-profit fund and contracts subject to different IFRS 17
measurement models are grouped separately. The portfolios are allocated to
cohorts based on whether they are onerous at inception or based on their
expected level of profitability using information available at inception.
For reinsurance contracts held, portfolios are based upon similar risks to
those of the underlying contracts. The reinsurance contracts held are assessed
for aggregation requirements on an individual contract basis. The Group tracks
internal management information reflecting historical experience of such
contracts' performance. This information is used for setting pricing of these
contracts such that they result in reinsurance contracts held being in a net
cost position without a significant possibility of a net gain arising
subsequently.
The grouping of the insurance contracts are determined at initial recognition
and are not subsequently reassessed. Therefore, a contract will remain within
the assigned aggregation group until it is derecognised; either by expiry or
modification.
Recognition
The Group recognises groups of insurance contracts that it issues from the
earliest of the following:
· the beginning of the coverage period of the group of contracts;
· the date when the first payment from the policyholder in the group is
due or actually received if there is no due date; or
· for a group of onerous contracts, as soon as facts and circumstances
indicate that the group is onerous.
Investment contracts with DPF are initially recognised at the date when the
Group becomes a party to the contract.
Insurance contracts acquired in a business combination within the scope of
IFRS 3 Business combinations or a portfolio transfer are accounted for as if
they were entered into at the date of acquisition or transfer.
When the contract is recognised, it is added to an existing group of contracts
or, if the contract does not qualify for inclusion in an existing group, it
forms a new group to which future contracts are added. Groups of contracts are
established on initial recognition and their composition is not revised once
all contracts have been added to the group.
Reinsurance contracts held are recognised from the earliest of the following:
· the beginning of the coverage period of the group of reinsurance
contracts held. However, the Group delays the recognition of a group of
reinsurance contracts held that provide proportionate coverage (for example
through a quota share arrangement) until the date when any underlying
insurance contract is initially recognised, if that date is later than the
beginning of the coverage period of the group of reinsurance contracts held;
and
· the date the Group recognises an onerous group of underlying insurance
contracts if the Group entered into the related reinsurance contract held in
the group of reinsurance contracts held at or before that date.
The Group adds new contracts to the group in the reporting period in which
that contract meets one of the criteria set out above.
Contract boundaries
The Group includes in the measurement of a group of insurance contracts all
the future cash flows within the boundary of each contract in the group. Cash
flows are within the boundary of an insurance contract if they arise from the
rights and obligations that exist during the period in which the policyholder
is obligated to pay premiums or the Group has a substantive obligation to
provide the policyholder with insurance contract services. A substantive
obligation to provide insurance contract services ends when:
· the Group has the practical ability to reprice the risks of the
particular policyholder or change the level of benefits so that the price
fully reflects those risks; or
· both of the following criteria are satisfied:
- the Group has the practical ability to reprice the contract or a
portfolio of contracts so that the price fully reflects the reassessed risk of
that portfolio; and
- the pricing of premiums up to the date when risks are reassessed does
not reflect the risks related to periods beyond the reassessment date.
Where an expected premium or expected claim is not within the contract
boundary, it is not recognised as a cash flow of the contract and is instead
considered to relate to a future insurance contract and recognised when those
contracts meet the recognition criteria.
The contract boundary is reassessed at each reporting date to include the
effect of changes in circumstances on the Group's substantive rights and
obligations and, therefore, may change over time.
The contract boundary for a reinsurance contract is dependent on the terms and
conditions of the reinsurance contract and therefore may not necessarily be
the same as for the underlying contracts. Where the reinsurance contract is
open to new business on agreed terms for a period of time, the contract
boundary may include estimates of reinsurance on insurance contracts that have
not yet been issued or reported.
Measurement
The Group's insurance contracts issued without direct participation features
are grouped together under annuity, protection and other non-linked insurance
business. These groups of insurance contract are measured under the General
Model ('GM').
Direct participating contracts issued by the Group are contracts with DPF
where the Group holds the pool of underlying assets. Direct participating
insurance contracts are grouped together and reported primarily as either
unit-linked or with-profit business. The VFA is also used to calculate some
protection contracts with direct participation features. These groups of
contracts are measured using the variable fee approach ('VFA'), unless they
fail the eligibility test to be treated under this approach, in such
circumstances they are measured under the GM.
Reinsurance contracts held are measured under the GM irrespective of the
measurement model used for the underlying contracts. Certain with-profit funds
within the Group hold non-profit insurance business such as annuities. This
business will also be measured under the GM.
Initial measurement - Insurance contracts
On initial recognition, the Group measures a group of insurance contracts as
the total of (a) the fulfilment cash flows, which comprise estimates of future
cash flows, adjusted to reflect the time value of money and the associated
financial risks, and a risk adjustment for non-financial risk; and (b) the
CSM. The fulfilment cash flows of a group of insurance contracts do not
reflect the Group's non-performance risk.
The fulfilment cash flows comprise:
· unbiased and probability-weighted estimates of future cash flows that
are within the contract boundary plus an adjustment to reflect the time value
of money and the financial risks related to future cash flows, to the extent
that the financial risks are not included in the estimates of future cash
flows ('BEL'); and
· a risk adjustment for non-financial risk.
The measurement of fulfilment cash flows includes insurance acquisition cash
flows which are allocated as a portion of premium to profit or loss (through
insurance revenue) over the period of the contract in a systematic and
rational way based on the passage of time.
The risk adjustment for non-financial risk for a group of insurance contracts,
determined separately from the other estimates, is the compensation required
for bearing uncertainty about the amount and timing of the cash flows that
arises from non-financial risk. The Group applies a confidence level
technique. The risk adjustment is allocated to groups of contracts based on an
analysis of the risk profiles of the groups, reflecting the effects of the
diversification benefits between Group entities to the extent that the Group
includes it when determining the compensation required to bear that risk. The
Group includes diversification between Group entitieswhich use the Group
Internal Model for management decision making. Where a Standard Formula
approach is used, no diversification with other entities within the Group is
allowed for. The Group determines the risk adjustment using a one-year time
horizon, consistent with the time horizon used for Solvency II, a key metric
underlying how the Group is managed.
The CSM of a group of insurance contracts represents the unearned profit that
the Group will recognise over the life of the contract as insurance and
investment-related services are provided. For profitable groups of insurance
contracts the CSM is established to ensure that no profit or loss is
recognised at inception and consequently it offsets the net present value of
the expected cash flows (including initial premium and insurance acquisition
cash flows) and the risk adjustment. For a group of insurance contracts that
are onerous, the CSM is set to nil and a loss is immediately recognised in
profit or loss. A loss component of the liability for remaining coverage
('LRC') is established for the amount of loss recognised.
The initial recognition of the CSM is consistent for insurance contracts
applying the GM and VFA measurement approaches, however there are key
differences for subsequent measurement of the CSM under these measurement
models.
For groups of contracts acquired in a transfer of contracts or a business
combination, the consideration received for the contracts is included in the
fulfilment cash flows as a proxy for the premiums received at the date of
acquisition. In a business combination, the consideration received is the fair
value of the contracts at that date.
With-profit estate
The Group has a number of with-profit funds where surpluses are shared between
policyholders and shareholders. All such funds are closed to new business.
These funds typically have an estate, being a surplus of assets over those
needed to meet the liabilities of current policyholders. As these funds are
closed to new business, the surplus is expected to be distributed to existing
policyholders over time and the Group has determined it appropriate to
allocate the expected future policyholder payments from the estate to specific
groups of contracts within the measurement of the best estimate cash flows.
Subsequent measurement - Insurance contracts
The carrying amount of a group of insurance contracts at each reporting date
is the sum of the LRC and the liability for incurred claims ('LIC'). The LRC
comprises the BEL, risk adjustment and any remaining CSM at that date. The LIC
includes the BEL and risk adjustment (the fulfilment cash flows for incurred
claims and expenses that have not yet been paid, including claims that have
been incurred but not yet reported). There is no CSM associated with the LIC,
and as a result, any changes in the LIC are taken directly to profit or loss.
The fulfilment cash flows of groups of insurance contracts are measured at the
reporting date using current estimates of future cash flows, current discount
rates and current estimates of the risk adjustment for non-financial risk.
Changes in fulfilment cash flows are recognised as follows.
Changes relating to future services Adjusted against the CSM (or recognised in the insurance
service result in profit or loss if the group is onerous)
Changes relating to current or past services Recognised in the insurance service result in profit or loss
Where, during the coverage period, a group of insurance contracts becomes
onerous, the Group recognises a loss in profit or loss for the net outflow,
resulting in the carrying amount of the liability for the group being equal to
the fulfilment cash flows. A loss component is established by the Group for
the liability for remaining coverage for such groups of onerous contracts
representing the losses recognised.
The CSM of each group of contracts is calculated at each reporting date as
follows:
Insurance contracts measured under GM
For insurance contracts measured under the GM approach, the CSM is adjusted by
applying locked-in discount rates, while the BEL and risk adjustment are
adjusted using current discount rates.
The carrying amount of the CSM at each reporting date is the carrying amount
at the start of the year, adjusted for:
· the CSM of any new contracts that are added to the group in the year;
· interest accreted on the carrying amount of the CSM during the year;
· changes in fulfilment cash flows that relate to future services,
except to the extent that:
- any increases in the fulfilment cash flows exceed the carrying amount of
the CSM, in which case the excess is recognised as a loss in profit or loss
and creates a loss component; or
- any decreases in the fulfilment cash flows are allocated to the loss
component, reversing losses previously recognised in profit or loss;
· the effect of any currency exchange differences on the CSM; and
· the amount recognised as insurance revenue because of the services
provided in the year (see the 'Insurance revenue' accounting policy below for
further details).
Changes in fulfilment cash flows relating to future service that adjust the
CSM comprise:
· experience adjustments arising from the difference between premiums
received and the expected amounts estimated at the beginning of the period,
that relate to future service, along with any associated acquisition costs;
· changes in estimates of the present value of future cash flows in the
BEL and risk adjustment;
· differences between any investment component expected to become
payable in the period and the actual investment component that becomes
payable; and
· changes in the risk adjustment for non-financial risk that relate to
future service.
Changes in discretionary cash flows are regarded as relating to future
services and accordingly adjust the CSM.
The impact of discounting the risk adjustment for business measured under GM
is disaggregated and recognised within Net finance income or expenses from
insurance contracts within the income statement.
Insurance contracts measured under VFA model
The Group's unit-linked and with-profit business that meets the VFA
eligibility criteria are direct participating contracts under which the
Group's obligation to the policyholder is the net of:
· the obligation to pay the policyholder an amount equal to the fair
value of the underlying items; and
· a variable fee in exchange for future services provided by the
contracts, being the amount of the Group's share of the fair value of the
underlying items less fulfilment cash flows that do not vary based on the
returns on underlying items. The Group provides investment services under
these contracts by giving a return based on underlying items, in addition to
insurance coverage.
For unit-linked and with-profit contracts that are measured under the VFA
model, interest is not accreted on the CSM using a locked-in discount rate,
instead it is determined with reference to the underlying items, reflecting
that on these types of insurance contracts the Group fees for providing
investment-related services are determined with reference to the value of the
investments associated with the policyholder's policy. For example, annual
management charges ('AMC') are determined by reference to the value of the
policyholder's fund value and the shareholder's share of bonuses on a
with-profit policy in a 90:10 fund is determined based on the performance of
the with-profit fund.
The variable fee earned by the Group is consequently the Group's share of the
fair value of underlying items less fulfilment cash flows that do not vary
based on returns of the underlying items.
For unit-linked contracts the underlying items are funds that the unit price
of the investment chosen by the policyholder varies with.
For with-profits contracts, the underlying items are typically the net assets
of the relevant with-profit fund, including the estate and the fair value of
non-profit contracts within the fund. With-profit funds can vary in their
nature and operation therefore will be dependent on facts and circumstances.
When measuring a group of unit-linked and with-profit contracts using the VFA
model, the Group adjusts the fulfilment cash flows for all of the changes in
the obligation to pay policyholders, an amount equal to the fair value of the
underlying items. These changes do not relate to future service and are
recognised in profit or loss. The Group then adjusts the CSM for changes in
the amount of the Group's share of the fair value of the underlying items,
which relate to future services, as explained below.
The carrying amount of the CSM at each reporting date is the carrying amount
at the start of the year, adjusted for:
· the CSM of any new contracts that are added to the group in the year;
· the change in the amount of the Group's share of the fair value of
the underlying items and changes in fulfilment cash flows that relate to
future services, except to the extent that:
- the Group has applied the risk mitigation option to exclude from the CSM
changes in the effect of financial risk on the amount of its share of the
underlying items or fulfilment cash flows;
- a decrease in the amount of the Group's share of the fair value of the
underlying items, or an increase in the fulfilment cash flows that relate to
future services, exceeds the carrying amount of the CSM, giving rise to a loss
in profit or loss (included in insurance service expenses) and creating a loss
component; or
- an increase in the amount of the Group's share of the fair value of the
underlying items, or a decrease in the fulfilment cash flows that relate to
future services, is allocated to the loss component, reversing losses
previously recognised in profit or loss (included in insurance service
expenses);
· the effect of any currency exchange differences on the CSM; and
· the amount recognised as insurance revenue because of the services
provided in the year (see the 'Insurance revenue' accounting policy below for
further details).
Changes in fulfilment cash flows that relate to future service include the
changes relating to future services specified above for contracts without
direct participation features (measured at current discount rates) and changes
in the effect of the time value of money and financial risks that do not arise
from underlying items.
The Group does not currently apply the risk mitigation option to any material
extent.
Loss components
A loss component represents a notional record of the losses attributable to
each group of onerous insurance contracts. The loss component is released
based on a systematic allocation of the subsequent changes relating to future
service in the fulfilment cash flows to (i) the loss component; and (ii) the
liability for remaining coverage excluding the loss component. The loss
component is also updated for subsequent changes in estimates of the
fulfilment cash flows and the risk adjustment relating to future service. The
systematic allocation of subsequent changes to the loss component results in
the total amounts allocated to the loss component being equal to zero by the
end of the coverage period of a group of insurance contracts. The Group uses
coverage units as the method of systematic allocation.
Reinsurance contracts held - measurement
The carrying amount of a group of reinsurance contracts at each reporting date
is the sum of the asset/liability for remaining coverage and the
asset/liability for incurred claims. The asset/liability for remaining
coverage comprises (a) the fulfilment cash flows that relate to services that
will be received under the contracts in future periods and (b) any remaining
CSM at that date.
The measurement of reinsurance contracts held at initial recognition follows
the same principles as those for insurance contracts issued, with the
exception of the following:
· measurement of the cash flows include an allowance on a
probability-weighted basis for the effect of any non-performance by the
reinsurers, including the effects of collateral;
· the risk adjustment for non-financial risk is determined so that it
represents the amount of risk being transferred to the reinsurer; and
· the Group recognises both day 1 gains and day 1 losses at initial
recognition in the statement of consolidated financial position as CSM and
releases this to profit or loss as the reinsurer renders services, except for
any portion of a day 1 loss that relates to events before initial recognition.
Where the Group recognises a loss on initial recognition of an onerous group
of underlying contracts, it establishes a loss-recovery component of the asset
for remaining coverage depicting the recovery of losses recognised.
To determine the risk adjustment for reinsurance contracts held, the Group
will apply the approach set out above for insurance contracts both gross and
net of reinsurance and determine the amount of risk being transferred to the
reinsurer as the difference between the two results.
The loss-recovery component determines the amounts that are subsequently
presented in profit or loss as reversals of recoveries of losses from the
reinsurance contracts and are excluded from the allocation of reinsurance
premiums paid. It is adjusted to reflect changes in the loss component of the
onerous group of underlying contracts, but it cannot exceed the portion of the
loss component of the onerous group of underlying contracts that the Group
expects to recover from the reinsurance contracts.
The Group adjusts the CSM of the group to which a reinsurance contract belongs
and as a result recognises income when it recognises a loss on initial
recognition of onerous underlying contracts, if the reinsurance contract is
entered into before or at the same time as the onerous underlying contracts
are recognised. The adjustment to the CSM is determined by multiplying:
· the amount of the loss that relates to the underlying contracts; and
· the percentage of claims on the underlying contracts that the Group
expects to recover from the reinsurance contracts.
The subsequent measurement of reinsurance contracts held follows the same
principles as those for insurance contracts issued, with the exception of the
following:
· changes in the fulfilment cash flows are recognised in profit or loss
if the related changes arising from the underlying ceded contracts have been
recognised in profit or loss. Alternatively, changes in the fulfilment cash
flows adjust the CSM; and
· changes in the fulfilment cash flows that result from changes in the
risk of non-performance by the issuer of a reinsurance contract held do not
adjust the CSM as they do not relate to future service. The effect of the
non-performance risk of the reinsurer is assessed at each reporting date and
the effect of changes in the non-performance risk is recognised in profit or
loss.
Modification and derecognition
The Group derecognises insurance and reinsurance contracts when:
· the rights and obligations relating to the contract are extinguished
(i.e. discharged, cancelled or expired); or
· the contract is modified such that the modification results in a
change in the measurement model, or the applicable standard for measuring a
component of the contract. In such cases, the Group derecognises the initial
contract and recognises the modified contract as a new contract.
Presentation
Insurance revenue
The Group's insurance revenue depicts the provision of services arising from a
group of insurance contracts at an amount that reflects the consideration to
which the Group expects to be entitled in exchange for those services.
Insurance revenue from a group of insurance contracts is therefore the
relevant portion for the period of the total consideration for the contracts,
(i.e. the amount of premiums paid to the Group adjusted for financing effect
(the time value of money) and excluding any investment components). The total
consideration for a group of contracts covers amounts related to the provision
of services and is comprised of:
· the release of the CSM;
· changes in the risk adjustment for non-financial risk relating to
current services;
· claims and other insurance service expenses incurred in the period,
generally measured at the amounts expected at the beginning of the period;
· experience adjustments arising from premiums received in the period
other than those that relate to future service;
· insurance acquisition cash flows recovery which is determined by
allocating the portion of premiums related to the recovery of those cash flows
on the basis of the passage of time over the expected coverage of a group of
contracts; and
· other amounts, including any other pre-recognition cash flow assets
derecognised at the date of initial recognition.
The amount of the CSM of a group of insurance contracts that is recognised as
insurance revenue in each year is determined by identifying the coverage units
in the group, allocating the CSM remaining at the end of the year equally to
each coverage unit provided in the year and expected to be provided in future
years, and recognising in profit or loss the amount of the CSM allocated to
coverage units provided in the year.
The number of coverage units in a group is the quantity of service provided by
the contracts in the group, determined by considering for each contract the
quantity of benefits provided under a contract and its expected coverage
period. The coverage units are reviewed and updated at each reporting date.
The Group consider the following when determining coverage units:
· the quantity of benefits provided by contracts in the group;
· the expected coverage period of contracts in the group;
· the likelihood of insured events occurring, only to the extent that
they affect the expected coverage period of contracts in the group;
· for insurance contracts without direct participation features, the
generation of an investment return for the policyholder, if applicable
(investment-return service); and
· or insurance contracts with direct participation features, the
management of underlying items on behalf of the policyholder
(investment-related service).
The coverage units for groups of reinsurance contracts held is determined
based on the quantity of coverage provided by the reinsurance contracts held
in the group but not the coverage provided by the insurer to its policyholders
through the underlying insurance contracts. However, where the reinsurance
held is a 100% quota share arrangement, it is expected that the coverage units
would be consistent with the underlying insurance contracts. Where there is a
change to the fulfilment cash flows of the group of underlying policies that
does not adjust the CSM, it also would not adjust the CSM of the group of
reinsurance contracts.
Insurance service expense
Insurance service expenses arising from insurance contracts are recognised in
profit or loss generally as they are incurred. They exclude repayments of
investment components and comprise the following items:
· adjustment to liabilities for incurred claims and benefits, excluding
investment components reduced by loss component allocations;
· other incurred directly attributable expenses, including amounts of
any other pre-recognition cash flows assets (other than insurance acquisition
cash flows) derecognised at the date of initial recognition;
· insurance acquisition cash flows amortisation;
· insurance acquisition cash flows assets impairment; and
· reversal of impairment of assets for insurance acquisition cash
flows.
Net income or expense from reinsurance contracts held
Income and expenses from reinsurance contracts are presented separately from
income and expenses from insurance contracts. Income and expenses from
reinsurance contracts, other than insurance finance income or expenses, are
presented on a net basis as 'net expenses from reinsurance contracts' in the
insurance service result.
Net expenses from reinsurance contracts comprise an allocation of reinsurance
premiums paid less amounts recovered from reinsurers.
The Group recognises an allocation of reinsurance premiums paid in profit or
loss as it receives services under groups of reinsurance contracts. The
allocation of reinsurance premiums paid relating to services received for each
period represents the total of the changes in the asset for remaining coverage
that relates to services for which the Group expects to pay consideration.
Insurance finance income or expenses
Insurance finance income and expenses comprise changes in the carrying amounts
of groups of insurance contracts arising from the effects of the time value of
money, financial risk and changes therein, unless any such changes for groups
of direct participating contracts are allocated to a loss component and
included in insurance service expenses. They include changes in the
measurement of groups of contracts caused by changes in the value of
underlying items. The Group has chosen not to disaggregate insurance finance
income or expenses between profit or loss and Oher Comprehensive Income.
Accordingly, all insurance finance income or expenses are presented within the
profit or loss.
Interim financial reporting
The Group has elected not to change the treatment of accounting estimates made
in previous interim financial statements. Therefore, its annual results are
measured using a year-to-date approach and are not affected by the treatment
of accounting estimates made in the interim financial statements issued during
the financial year.
2.1.4 Significant judgements and estimates
The Group applies significant judgement and estimation when determining the
inputs, assumptions and techniques it uses to determine the BEL, CSM and risk
adjustment at each reporting period to measure the insurance contract and
reinsurance contact liabilities/assets. The main areas where significant
judgement and estimation was required are:
Contract classification
Classification of contracts as insurance (or reinsurance) is based upon an
assessment of the significance of insurance risk transferred to the Group.
Insurance contracts are defined by IFRS 17 as those containing significant
insurance risk if, and only if, an insured event could cause an insurer to
make significant additional payments in any scenario, excluding scenarios that
lack commercial substance, at the inception of the contract.
Classification of contracts as investment with DPF is based upon an assessment
of whether the discretionary amount of benefits is expected to be a
significant amount of the total benefits.
Amortisation of the CSM
The Group applies judgements when determining the amount of the CSM for a
group of insurance contracts to be recognised in profit or loss as insurance
revenue in each period to reflect the insurance contract services provided in
that period. The amount is determined by considering for each group of
contracts the quantity of the benefits provided and its expected coverage
period. Determining the coverage unit requires significant judgement, taking
into consideration a number of areas, including:
· identification of a coverage unit that is deemed to be a suitable proxy
for the service provided. This is particularly relevant for products that
provide a combination of different types of insurance coverage,
investment-related service and investment-return service; and
· the allowance for time value of money in the release of the coverage
unit (i.e. whether or not the coverage units should be discounted).
Following an assessment, the Group has determined the quantity of the benefits
provided under each contract to be a suitable proxy for the service provided
as follows:
Type of business / products Coverage unit (quantity of benefits)
Term life assurance Sum assured in force
Endowment
Non-participating whole-life
Other protection products
Immediate annuity Annuity payments
Deferred annuity Fund size during deferred period and annuity payments for the payment period
Unit linked Annual management charge and insurance charges
Conventional with-profits (CWP) & Unitised with-profits (UWP) Maximum of the guaranteed benefit and asset share
In relation to the application of discount rate in determining the coverage
units, the Group has elected to apply discounting as this gives a more even
allocation of profit as services are provided over the life of a group of
contracts. The discount rate is the locked-in rate for insurance contracts
measured under the GM and current rates are used for the contracts measured
under the VFA.
Measurement of insurance contract liabilities
In applying IFRS 17 requirements for the measurement of insurance contract
liabilities, the following inputs and methods were used that include
significant estimates:
· the present value of future cash flows is estimated using deterministic
scenarios, except where stochastic modelling involves projecting future cash
flows under a large number of possible economic scenarios for market variables
such as interest rates and equity returns and where the cash flows reflect a
series of interrelated options that are implicit or explicit;
· the approach and assumptions used to derive discount rates, including
any illiquid premiums (see note 14.1.1);
· the approach and confidence level for estimating risk adjustments for
non-financial risk (see note 14.1.2); and
· the assumptions about future cash flows relating to mortality,
morbidity, policyholder behaviour, and expense inflation.
In addition, the following are the primary additional areas of significant
judgement and estimation required for the transition to IFRS 17:
Determination of transition method and its application
The Group exercised significant judgement in determining which transition
method was applied for each group of insurance contracts, considering the
impracticability assessment for the application of FRA, including determining
whether sufficient reasonable and supportable information was available to
apply a FRA. Where it was assessed that a FRA was impracticable, the Group
determined, in line with the options available in IFRS 17, to use the FVA.
In applying the FVA, the Group has used reasonable and supportable information
at the transition date in order to identify groups of insurance contracts and
to determine whether any contracts are considered to be direct participating
contracts, which meet the VFA eligibility criteria. For groups of contracts
measured using the FVA, the Group has aggregated contracts issued more than
one year apart.
In estimating the fair value, the Group has used significant judgement to
determine adjustments required to reflect a market participant's view, and
also to allocate fair value between groups of insurance contracts as follows:
· only relevant future cash flows within the boundaries of the
insurance contracts were included in the fair value estimation;
· assumptions about BEL were adjusted and simplified by applying IFRS 17
parameters i.e. discount rate, expenses, contract boundary plus incorporating
the risk premium to reflect the view of a market participant;
· discount rates were determined at the transition date, based on the
risk-free rate with an allowance for illiquid premium taken into account;
· the risk premium was calibrated to a market participant view of an
appropriate cost of capital rate; and
· a proportional approach was used to allocate the risk premium to each
group of insurance contracts.
Eligibility assessment for use of VFA
The Group has issued unit-linked and with-profits contracts where the return
on the underlying items is shared with policyholders. Underlying items
comprise mainly specified portfolios of investment assets for unit-linked
contracts and the net assets of a with-profit fund for with-profit policies
that determine amounts payable to policyholders. The Group has exercised
significant judgement to assess whether the amounts expected to be paid to the
policyholder constitute a substantial share of the fair value returns on the
underlying items. The policyholder's share of the fair value returns on
underlying items includes amounts deducted to cover non-investment services,
e.g. administration and risk charges. The fair value returns assumed on the
underlying items also reflect the expected real world returns over the
duration of the contract or group of insurance contracts being tested.
Determination of contract boundaries
The assessment of the contract boundary defines which future cash flows are
included in the measurement of a contract. This requires judgement and
consideration of the Group's substantive rights and obligations under the
contract. The Group exercises significant judgement to determining the
appropriate contract boundaries, taking into consideration a number of
factors, including: features and terms and conditions of products; any implied
substantive obligations and rights arising from the features of the product or
policyholder needs it is meeting; pricing practices; and administrative
practices.
Cash flows are within the boundaries of investment contracts with DPF if they
result from a substantive obligation of the Group to deliver cash at a present
or future date.
Separating distinct investment components from insurance and reinsurance contracts
When assessing whether an investment component is distinct, the Group
considers the following, which may indicate that the insurance and investment
component are highly interrelated:
· the value of one component varies with the other component;
· existence of an option to switch between the different components;
· discounts that span both elements e.g. reduced asset management
charges based on total size of contract; and
· other interacting features, e.g. insurance risk from premium waivers,
return of premium covering both elements of the policy.
Where the investment component is non-distinct, the whole contract is measured
under IFRS 17. Distinct investment components are measured under IFRS 9.
2.2 Adoption of IFRS 9 Financial Instruments
IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement for
annual periods beginning on or after 1 January 2018. The Group elected, under
the amendments to IFRS 4 to apply the temporary exemption from IFRS 9, to
defer the initial application date of IFRS 9 to align with the initial
application of IFRS 17. The Group has therefore adopted the requirements of
IFRS 9 from 1 January 2023 and in accordance with the transition provisions in
the standard, comparatives have not been restated.
IFRS 9 introduces new requirements for classifying and measuring financial
assets and liabilities, impairment methodology, and general hedge accounting
rules and replaced the corresponding sections of IAS 39.
2.2.1 Classification and measurement of financial instruments
Financial assets
IFRS 9 requires all financial assets to be assessed based on a combination of
the Group's business model for managing the assets and the instruments'
contractual cash flow characteristics. As a result of adopting IFRS 9 on 1
January 2023, certain loans and deposits and cash and cash equivalents
investment asset balances, previously classified as amortised cost, have now
been reclassified at fair value through profit or loss ('FVTPL') (mandatory)
category. The classification adopted is driven by the business model
assessment which determined that these assets are managed and evaluated on a
fair value basis. These financial assets, which back policyholder liabilities,
are actively managed and therefore support the wider objective of the Group to
maximise Solvency II headroom. The reclassification of these assets has not
resulted in an adjustment to equity at 1 January 2023 as the fair value of
these assets at this date was equal to the amortised cost.
Under IAS 39, certain underlying items of participating contracts were
designated as at FVTPL because the Group managed them and evaluated their
performance on a fair value basis in accordance with a documented investment
strategy. Under IFRS 9, portfolios of these assets are mandatorily measured at
FVTPL as the business model assessment concludes that they are managed and
evaluated on a fair value basis and consequently the classification as FVTPL
remains unchanged upon adoption of IFRS 9.
All other financial assets that are not actively managed such as certain cash
and cash equivalents, receivables and loans and deposits, are typically held
to collect cash flows and therefore continue to be classified as amortised
cost under IFRS 9.
The Group has not elected to measure any equity securities financial assets at
fair value through other comprehensive income ('FVOCI'). Further, no other
debt securities financial assets are classified as FVOCI on adoption of IFRS
9.
Financial liabilities
IFRS 9 has not had a significant effect on the Group's accounting policies for
financial liabilities as the classification and measurement of financial
liabilities remains largely unchanged from IAS 39. Financial liabilities are
either classified as amortised cost or at FVTPL.
Investment contracts without DPF, which do not transfer significant insurance
risk, continue to be accounted for as a financial liability and designated at
FVTPL on the basis that these liabilities are both managed on a fair value
basis and are designated as such so as to avoid an accounting mismatch with
the assets held to back them.
On transition to IFRS 17 and IFRS 9, deposits from reinsurers are no longer
classified as financial liabilities under IFRS 9 in accordance with the IFRS
17 requirements for 'premium withheld' arrangements. The premiums withheld
have now become a component of fulfilment cash flows and for contracts with
deposit back arrangements, the presentation of the deposit back liability has
now changed to be shown as an offset to the reinsurance asset.
The Group has assessed the IFRS 9 requirement that changes in fair value of
financial liabilities relating to credit risk be presented in OCI, with the
balance of the change in fair value to be presented in profit and loss, unless
this treatment would create or enlarge an accounting mismatch in profit and
loss. Based on the Group assessment, no financial liabilities were identified
as requiring split presentation of movements between OCI and profit and loss
largely as this would create an accounting mismatch as the assets held to back
these liabilities are at FVTPL.
The valuation of investment contract liabilities without DPF are measured at
the fair value of the related assets and liabilities. The liability is the sum
of the investment contract liabilities plus an additional amount to cover the
present value of the excess of future policy costs over future charges.
The application of the classification and measurement requirements in IFRS 9
at 1 January 2023 resulted in the following reclassification adjustments:
£m IAS 39 IFRS 9
Financial assets Measurement category Carrying amount Measurement category Carrying amount
£m
£m
Loans and deposits(1) Amortised Cost 254 FVTPL 254
Cash and cash equivalent(1) Amortised Cost 8,423 FVTPL 8,423
(1 Actively managed investment assets)
2.2.2 Impairment
The adoption of IFRS 9 has changed the Group's accounting for impairment
losses for financial assets held at amortised cost by replacing IAS 39's
incurred loss approach with a forward-looking expected credit loss ('ECL')
approach. The new impairment model applies to the Group's financial assets
carried at amortised cost.
A significant portion of Group's financial assets are carried at FVTPL under
IFRS 9 and are therefore not subject to ECL assessment. The other financial
assets classified as amortised cost and subject to ECL mainly relate to
certain loan assets, other receivables and certain cash and cash equivalents
balances.
In accordance with IFRS 9, the Group has applied the ECL model to financial
assets measured at amortised cost. For these in-scope financial assets at the
reporting date either the lifetime expected credit loss or a 12-month expected
credit loss is provided for, depending on the Group's assessment of whether
the credit risk associated with the specific asset has increased significantly
since initial recognition. The Group's current credit risk grading framework
comprises the following categories:
Category Description Basis for recognising ECL
Performing The counterparty has a low risk of default and does not have 12 month ECL
any past-due amounts
Doubtful There has been a significant increase in credit risk since initial recognition Lifetime ECL - not credit impaired
In default There is evidence indicating the asset is credit-impaired Lifetime ECL - credit impaired
Write-off There is evidence indicating that the counterparty is in severe financial Amount is written off
difficulty and the Group has no realistic prospect of recovery
The financial assets held at amortised cost are assessed at transition as
'performing' and this assessment is summarised below.
Loans and deposits - the Group has assessed the estimated credit losses of
these loans and deposits as low due to the external credit ratings of the
counterparties resulting in low credit risk and there being no past-due
amounts.
Other receivables - these balances relate to investment broker balances and
other regular receivables due to the Group in the normal course of business.
Expected credit losses are assessed as being immaterial given the typically
short-term nature of these balances.
Cash and cash equivalents - the Group's cash and cash equivalents are held
with banks and financial institutions, which have investment grade 'A' credit
ratings. The Group considers that its cash and cash equivalents have low
credit risk based on the external credit ratings of the counterparties and,
there being no history of default. The impact to the net carrying amount
stated in the table above is therefore considered not to be material.
Based on the above assessment, an immaterial credit loss balance has been
determined due to these financial assets being predominantly short-term and
having low credit risk.
2.2.3 Hedge accounting
The Group has applied IFRS 9's hedge accounting requirements. The Group uses
cross currency swaps to hedge the currency risk arising from borrowings
denominated in foreign currencies. The Group has carried over the current
hedging relationships as cash flow hedges under IFRS 9. The IFRS 9 hedge
accounting model requires the extended documentation of each hedging
relationship. The Group has updated the existing hedging documentation to
reflect the changes to the effectiveness testing process to include
qualitative testing on a prospective basis including the analysis of economic
relationship between the hedged item and hedging instrument, analysis of
source of hedge ineffectiveness, determining the hedge ratio and assessment of
whether the effect of credit risk dominates the value changes that result from
the economic relationship. The current hedging relationships are
straightforward arrangements whereby the cross currency swaps fully hedge the
underlying hedged item and they are all fully collateralised.
2.2.4 New accounting policies
2.2.4.1 Financial assets
IFRS 9 requires financial assets to be classified into one of the following
measurement categories: FVTPL, FVOCI and amortised cost. Classification is
made based on the objectives of the entity's business model for managing its
financial assets and the contractual cash flow characteristics of the
instruments.
Financial assets are measured at amortised cost where they have:
· contractual terms that give rise to cash flows on specified dates,
that represent solely payments of principal and interest on the principal
amount outstanding; and
· are held within a business model whose objective is achieved by
holding to collect contractual cash flows.
These financial assets are initially recognised at cost, being the fair value
of the consideration paid for the acquisition of the financial asset. All
transaction costs directly attributable to the acquisition are also included
in the cost of the financial asset. Subsequent to initial recognition, these
financial assets are carried at amortised cost, using the effective interest
method.
Equities, debt securities, collective investment schemes, derivatives and
certain loans and deposits and cash and cash equivalents are measured at FVTPL
as they are managed and evaluated on a fair value basis.
2.2.4.2 Financial liabilities
Financial liabilities are classified and subsequently measured at amortised
cost, except for derivatives and investment contracts without DPF, which are
measured at FVTPL. There have been no changes to the accounting policies
presented in the 2022 consolidated financial statements.
2.2.4.3 Impairment of financial assets
The Group assesses the expected credit losses associated with its loans and
deposits, receivables, cash and cash equivalents and other financial assets
carried at amortised cost. The measurement of credit impairment is based on an
ECL model and depends upon whether there has been a significant increase in
credit risk.
For those credit exposures for which credit risk has not increased
significantly since initial recognition, the Group measures loss allowances at
an amount equal to the total expected credit losses resulting from default
events that are possible within 12 months after the reporting date ('12-month
ECL'). For those credit exposures for which there has been a significant
increase in credit risk since initial recognition, the Group measures and
recognises an allowance at an amount equal to the expected credit losses over
the remaining life of the exposure, irrespective of the timing of the default
('Lifetime ECL'). If the financial asset becomes 'credit-impaired' (following
significant financial difficulty of issuer/borrower, or a default/breach of a
covenant), the Group will recognise a Lifetime ECL. ECLs are derived from
unbiased and probability-weighted estimates of expected loss.
The loss allowance reduces the carrying value of the financial asset and is
reassessed at each reporting date. ECLs and subsequent remeasurements of the
ECL, are recognised in the consolidated income statement. For other
receivables, the ECL rate is recalculated each reporting period with reference
to the counterparties of each balance.
2.2.5 Critical accounting estimates and judgements
The critical estimates and judgements in relation to financial instruments are
as set out in note A.3.2 of the Group's 2022 annual Report and Accounts.
Details of the significant inputs to the measurement of the fair value of
Level 3 financial instruments is set out in note 16.2.3 and sensitivities to
these inputs in note 16.2.5.
3. Significant transactions
3.1 Acquisition of SLF Canada UK Limited
On 3 April 2023, the Group acquired 100% of the issued share capital of SLF of
Canada UK Limited from Sun Life Assurance Company of Canada, part of the Sun
Life Financial Inc. Group, for total cash consideration of £250 million.
SLF of Canada UK Limited and its subsidiaries are a closed book life insurance
business that has a portfolio of pension, life and annuity products.
The acquisition is in line with the Group's strategy to undertake mergers and
acquisitions ('M&A') to acquire new customers at scale and deliver better
outcomes for them. The Group also transforms acquired businesses to deliver
significant cost and capital synergies, creating significant shareholder
value.
The table below summarises the fair value of identifiable assets and acquired
and liabilities assumed as at the date of acquisition.
Notes Fair value
£m
Assets
Acquired in-force business 16
Pension scheme asset 13 16
Reimbursement rights 13 2
Investment property 283
Financial assets 7,552
Deferred tax assets 13
Prepayments and accrued income 46
Other receivables 64
Cash and cash equivalents 230
Total assets 8,222
Liabilities
Insurance contract liabilities 14 4,386
Reinsurance contract liabilities 14 153
Investment contract liabilities 3,190
Other financial liabilities 75
Provisions 5
Deferred tax liabilities 3
Payables related to direct insurance contracts 26
Current tax 4
Other payables 64
Total liabilities 7,906
Fair value of net assets acquired 316
Gain arising on acquisition (66)
Purchase consideration transferred 250
Analysis of cash flows on acquisition:
Net cash acquired with the subsidiaries (included in cash flow from investing 230
activities)
Cash paid (250)
Net cash flow on acquisition (20)
Acquired In-Force Business
An asset of £16 million arises reflecting the present value of future profits
associated with the acquired in-force business. The AVIF has been determined
by reference to the fair value of investment contract rights acquired.
The valuation of AVIF has been determined by reference to the assumptions
expected to be applied by a market participant in an orderly transaction. The
valuation approach uses present value techniques applied to the best estimate
cash flows expected to arise from policies that were in-force at the
acquisition date, adjusted to reflect the price of bearing the uncertainty
inherent in those cash flows. This approach incorporates a number of
judgements and assumptions which have impacted on the resultant valuation, the
most significant of which include expected policy lapses and surrender costs,
and the expenses associated with servicing the policies, together with
economic assumptions such as future investment returns and the discount rate.
The determination of the majority of these assumptions is carried out on a
consistent basis with that described in note 14.1 with appropriate adjustments
to reflect a market participant's view. The adjustment for risk for the
uncertainty in the cash flows has been determined using a cost of capital
approach.
The valuation of insurance contract liabilities and associated reinsurance
assets has been carried out on a consistent basis with that applied by the
Group under the Fair Value Approach on the transition to IFRS 17. Further
information on the Fair Value Approach is set out in note 2.1.1.
Deferred acquisition costs of £1 million and a deferred income liability of
£2 million have been derecognised on acquisition and replaced as part of the
AVIF balance.
Other receivables
The financial assets acquired include other receivables with a fair value of
£64 million. The gross amount due under the contracts is £64 million, of
which no balances are expected to be uncollectable.
Tax
The tax impact of the fair value adjustments recognised on acquisition has
been reflected in the acquisition balance sheet.
Gain on acquisition
A gain on acquisition of £66 million has been recognised in the Group's
consolidated income statement for the half year ended 30 June 2023, reflecting
the excess of the fair value of the net assets acquired over the consideration
paid for the acquisition of the SLF of Canada UK businesses.
The consideration for the acquisition was fixed and determined using a 'locked
box' pricing mechanism as at 31 December 2021. Over the period between 31
December 2021 and the completion date, the value of the net assets acquired
increased. This principally reflects a negative impact on assets from
increasing yields being more than offset by a reduction in liabilities as a
result of favourable assumption changes and demographic experience.
Additionally, in accordance with IFRS 3 Business Combinations, the acquired
defined benefit pension schemes have been measured on acquisition in
accordance with the Group's accounting policies as set out in note G1 of the
2022 Annual Report and Accounts, as opposed to a fair value basis. .
Transaction costs
Transaction costs of £4 million have been expensed and are included in
administrative expenses in the consolidated income statement. All of these
costs were paid.
Impact of the acquisition on results
From the date of acquisition, the SLF of Canada UK business contributed £12
million of total income, and negative £5 million of profit after tax
attributable to owners.
It is not possible to provide the total income and profit after tax
attributable to owners had the acquisition taken place at the beginning of the
year as key income statement items such as the amortisation of the contractual
service margin recognised under IFRS 17 are calculated with reference to the
fair value as at the date of acquisition.
3.2 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 agreed to 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 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'). A further impairment charge of £14
million has been recognised in the period (year ended 31 December 2022: £17
million). The major classes of assets and liabilities classified as held for
sale are as follows:
30 June 2023 31 December 2022
£m £m
Acquired in-force business 23 37
Investment property 2,357 2,506
Financial assets 4,363 4,629
Cash and cash equivalents 87 33
Assets classified as held for sale 6,830 7,205
Assets in consolidated funds (1) 1,035 1,147
Total assets of the disposal group 7,865 8,352
Investment contract liabilities (7,838) (8,312)
Other financial liabilities (3) (4)
Deferred tax liabilities (4) (7)
Accruals and deferred income (23) (37)
Liabilities classified as held for sale (7,868) (8,360)
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 unit holders.
4. 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 across 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. During the period, the Group reassessed its
reportable segments to reflect the way the Group's business is managed. At 30
June 2023, the Group has two reportable segments comprising Heritage and Open.
The Europe reportable segment is now included in the Open reportable segment
as this business primarily includes products that are actively being marketed
to new policyholders. In addition, Management Services costs are now allocated
to the Heritage and Open reportable segments. The comparative information has
been restated to reflect these changes and those arising from the
implementation of IFRS 17. 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.
The Open segment includes new and in-force individual annuity and Bulk
Purchase Annuity contracts written within shareholders funds, with the
exception of individual annuities written as a result of Guaranteed Annuity
Options vesting after the transition to IFRS 17, which remain in the Heritage
segment as they fall within the contract boundary of the original savings or
pension contract.
This segment also includes new and in-force life insurance and investment
unit-linked policies in respect of pensions and savings products that the
Group continues to actively market to new and existing policyholders. This
includes products such as workplace pensions and our retail pensions and
savings business.
Business written in Ireland and Germany primarily includes products that are
actively being marketed to new policyholders and is consequently included
within the Open segment. This segment also includes products sold under the
SunLife brand.
The Heritage segment includes all 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
Heritage segment also includes the Sun Life of Canada UK business acquired
during the year.
The Corporate Centre segment, which is not a reportable segment, principally
comprises operating costs borne by the Group's management services and
corporate holding companies that do not relate to the insurance business of
the Group. It also includes 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.
Segmental measure of performance: Adjusted operating profit
The Group uses a non-GAAP measure of performance, being adjusted operating
profit, to evaluate segmental performance. Adjusted 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.
The Group's adjusted operating profit methodology has been updated since it
was disclosed in the 2022 consolidated financial statements following the
transition to IFRS 17 'Insurance Contracts'.
The following sets out the adjusted operating profit methodology:
For unit-linked business accounted for under IFRS 9, adjusted operating profit
reflects the fees collected from customers less operating expenses including
overheads.
For unit-linked and with-profit business accounted for under IFRS 17, adjusted
operating profit reflects the release of the risk adjustment, amortisation of
CSM, and demographic experience variances in the period.
For shareholder annuity, other non-profit business and with-profit funds
receiving shareholder support accounted for under IFRS 17, adjusted operating
profit includes the release of the risk adjustment, amortisation of CSM, and
demographic experience variances in the period. Adjusted operating profit also
incorporates an expected return on the financial investments backing this
business and any surplus assets, with allowance for the corresponding movement
in liabilities.
Adjusted operating profit excludes the above items for non-profit business
written in a with-profit fund where these amounts do not accrue directly to
the shareholder.
Adjusted operating profit includes the effect of experience variances relating
to the current period for non-economic items, such as mortality and expenses.
It also incorporates the impacts of asset trading and portfolio rebalancing
where not reflected in the discount rate used in calculating expected return.
Operating profit is reported net of policyholder finance charges and
policyholder tax.
Adjusted operating excludes the impacts of the following items:
Economic variances
· the difference between actual and expected experience for economic
items recognised in the income statement, impacts of economic assumptions on
the valuation of liabilities measured under the General Model and the change
in value of loss components on Variable Fee Approach business resulting from
market movements on underlying items;
· economic volatility arising from the Group's hedging strategy which
is calibrated to protect the Solvency II capital position and cash generation
capability of the operating companies;
· the accounting mismatch resulting from the application of IFRS 17
between the measurement of non-profit business in a with-profit fund (noted
above) and the change in fair value of this business included within the
measurement of the with-profit contracts under the Variable Fee Approach; and
· the effect of the mismatch between changes in estimates of future
cash flows on General Model contracts measured at current discount rates and
the corresponding adjustment to the CSM measured at the discount rate
locked-in at inception.
Other
· amortisation and impairment of intangible assets (net of policyholder
tax);
· finance costs attributable to owners;
· gains or losses on the acquisition or disposal of subsidiaries (net
of related costs);
· the financial impacts of mandatory regulatory change;
· the profit or loss attributable to non-controlling interests;
· integration, restructuring or other significant one-off projects
impacting the income statement; and
· any other items which, in the Director's view, should be disclosed
separately by virtue of their nature or incidence to enable a full
understanding of the Group's financial performance. This is typically the case
where the nature of the item is not reflective of the underlying performance
of the operating companies.
The items excluded from adjusted operating profit are referred to as
'non-operating items'. Whilst the excluded items are important to an
assessment of the consolidated financial performance of the Group, management
considers that the presentation of adjusted operating profit provides a good
indicator of the underlying performance of the Group's operating segments and
the Group uses this, as part of a suite of measures, for decision-making and
monitoring performance. The Group's adjusted operating profit should be read
in conjunction with the IFRS profit before tax.
4.1 Segmental result
Half year ended Half year ended
30 June 2023 30 June 2022 restated
£m
£m
Operating profit
Heritage 117 114
Open 182 171
Corporate Centre (33) (31)
Total segmental operating profit 266 254
Economic variances (253) (1,540)
Amortisation of acquired in-force business (158) (172)
Amortisation and impairment of other intangibles (3) (3)
Other non-operating items (206) (146)
Finance costs attributable to owners (99) (103)
Loss before the tax attributable to owners of the parent (453) (1,710)
Profit before tax attributable to non-controlling interests 16 31
Loss before the tax attributable to owners (437) (1,679)
Other non-operating items in respect of the half year ended 30 June 2023
include:
· a gain on acquisition of £66 million reflecting the excess of the
fair value of the net assets acquired over the consideration paid for the
acquisition of SLF of Canada UK Limited (see note 3.1 for further details);
· a £52 million adverse impact associated with the Part VII transfer
of certain European business from the Group's UK Life Companies to a newly
established European subsidiary;
· £49 million of costs associated with the development of new product
propositions and strategic growth initiatives;
· costs of £38 million associated with ongoing integration and finance
transformation projects;
· ongoing costs of £25 million associated with the consolidation of
four Life Companies into a single entity, with the Part VII transfers expected
to complete in Q4 2023;
· £17 million costs associated with the delivery of the Group Target
Operating Model for IT and Operations, including the migration of policyholder
administration onto the TCS platform. Under IFRS 17, the majority of the
expected costs in respect of this project are attributable to insurance
contracts and have therefore been included within insurance contract
liabilities;
· £12 million of past service costs in relation to a Group pension
scheme (see note 13 for further details);
· £10 million of costs associated with regulatory and optimisation
activity, representing a one-time expenditure;
· £52 million of other corporate project costs; and
· net other one-off items totalling a cost of £17 million.
Other non-operating items in respect of the half year ended 30 June 2022
include:
· £17 million related to the increase in expected costs associated
with the delivery of the Group Target Operating Model for IT and Operations,
including the migration of policyholder administration onto the TCS platform;
· costs of £20 million 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 bulk purchase annuity transactions;
· £11 million of costs associated with finance transformation
activities, predominantly attributed to integration of acquired companies;
· £20 million of costs associated with regulatory activity across the
life companies, representing a one-time expenditure;
· £48 million of other corporate project costs; and
· net other one-off items totalling a cost of £20 million.
Further details of the economic variances funds are included in note 5.
4.2 Segmental revenue
Heritage Open Total
Half year ended 30 June 2023 £m £m £m
Revenue from external customers:
Insurance revenue 813 2,089 2,902
Fees and commissions 255 167 422
Total segmental revenue 1,068 2,256 3,324
Of the revenue from external customers presented in the table above for the
half year ended 30 June 2023, £3,110 million is attributable to customers in
the United Kingdom ('UK') and £214 million to the rest of the world. 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 2023 of £3,816 million located in the UK and £321 million located
in the rest of the world.
Heritage Open Total
Half year ended 30 June 2022 restated £m £m £m
Revenue from external customers:
Insurance revenue 730 1,885 2,615
Fees and commissions 279 159 438
Total segmental revenue 1,009 2,044 3,053
Of the revenue from external customers presented in the table above for the
half year ended 30 June 2022, £2,943 million is attributable to customers in
the United Kingdom ('UK') and £110 million to the rest of the world. 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 £4,915 million located in the UK and £418 million located
in the rest of the world.
5. Economic Variances
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.
5.1 Calculation of the long-term investment return
Adjusted operating profit for life assurance business is based on expected
investment returns on financial investments backing shareholder annuity, other
non-profit business, with-profit funds receiving shareholder support and
surplus assets, with allowance for the corresponding movements in
liabilities.
The long-term risk-free rate used as a basis for deriving the long-term
investment return is consistent with that set out in note 14.1.1 at the
15-year duration.
A risk premium of 250bps is added to the risk-free yield for equities (30 June
2022: 370bps), 160 bps for properties (30 June 2022: 280bps) and 140bps for
debt securities (30 June 2022: 100bps).The principal assumptions underlying
the calculation of the long-term investment return are:
Half year ended Half year ended 30 June 2022
30 June 2023 %
%
Equities 6.1 4.6
Property 5.2 3.7
Debt Securities 5.1 2.0
5.2 Life assurance business
The economic variances excluded from the long-term business operating profit
are as follows:
Half year ended Half year ended
30 June 2023
30 June 2022
£m £m
Economic variances (253) (1,540)
The net adverse economic variances of £253 million (half year ended 30 June
2022: £1,540 million) have primarily arisen as a result of rising yields and
a rise in global equity markets, offset by rising inflation, narrowing credit
spreads and strengthening of GBP. Movements in yields, inflation, currency 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 future
profits on investment contracts measured under IFRS 9 and the Solvency Capital
Requirements. While this gives rise to volatility in the IFRS results,
importantly the Group's cash generation and dividend capacity are unaffected
by this due to the Group's continued resilient Solvency II balance sheet.
6. Insurance revenue
An analysis of insurance revenue from group of insurance contracts held are
included in the following tables. Additional information on amounts recognised
in profit or loss is included in the insurance contract balances
reconciliation in note 14.
Half year ended 30 June 2023 Half year ended
30 June 2022
£m
£m
Amounts relating to changes in liabilities for remaining coverage:
CSM recognised in period for services provided 208 195
Change in risk adjustment for non-financial risk 45 70
Expected incurred claims and other insurance service expenses 2,633 2,367
Policyholder tax charges 12 (17)
Experience adjustments for premium receipts relating to past or present - (7)
service
Amounts relating to recovery of insurance acquisition cash flows 4 7
Insurance revenue 2,902 2,615
7. Tax (credit)/charge
7.1 Current period tax credit
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 2023 Half year ended 30 June 2022
restated
£m £m
Current tax:
UK corporation tax (2) 14
Overseas tax 62 48
60 62
Adjustment in respect of prior periods 7 5
Total current tax charge 67 67
Deferred tax:
Origination and reversal of temporary differences (193) (855)
Change in the rate of UK corporation tax (1) (111)
Write up of deferred tax assets - 10
Total deferred tax credit (194) (956)
Total tax credit (127) (889)
Attributable to:
- policyholders 65 (468)
- owners (192) (421)
Total tax credit (127) (889)
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 charge attributable to policyholder earnings is
£65 million (half year ended 30 June 2022: £468 million credit).
7.2 Tax charged to other comprehensive income
Half year ended 30 June 2023 Half year ended 30 June 2022
£m £m
Current tax charge/(credit) 9 (5)
Deferred tax charge on defined benefit schemes 12 160
Total tax charge relating to other comprehensive income items 21 155
7.3 Tax credited to equity
Half year ended 30 June 2023 Half year ended 30 June 2022
£m £m
Current tax credit on Tier 1 Notes (4) (3)
Deferred tax credit on foreign exchange and other items - (16)
Total tax credit to equity (4) (19)
7.4 Reconciliation of tax credit
Half year ended 30 June 2023 Half year ended 30 June 2022
£m £m
Loss before tax (372) (2,147)
Policyholder tax credit/(charge) (65) 468
Loss before the tax attributable to owners (437) (1,679)
Tax credit at standard UK rate of 23.5%/19% (1) (103) (319)
Non-taxable income and gains(2) (15) (5)
Disallowable expenses (1) -
Prior year tax credit for shareholders(3) 9 11
Movement on acquired in-force amortisation at rates other than 19% 10 7
Profits taxed at rates other than 23.5%/19% (4) (65) (14)
Derecognition /(recognition) of previously unrecognised deferred tax assets(5) (25) 14
Deferred tax rate change(6) (1) (112)
Current year losses not valued - 4
Other (1) (7)
Owners' tax credit (192) (421)
Policyholder tax (credit)/charge 65 (468)
Total tax credit for the period (127) (889)
1 The Group's 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 Relates principally to a profit arising on consolidation due to the
acquisition of the Sun Life of Canada businesses, not subject to deferred tax.
3 The 2023 tax credit relates to true-ups from the tax reporting provisions
in various entities within the group. The 2022 tax credit relates principally
to the reassessment of deferred tax on local GAAP to IFRS 17 actuarial
liability differences.
4 Profits taxed at rates other than 23.5% relates to overseas profits,
consolidated fund investments and UK life company profits subject to marginal
shareholder tax rates.
5 Relates primarily to the increase in recognition of deferred tax
attributes in Standard Life International DAC which can be supported by
deferred tax on local GAAP to IFRS 17 actuarial liability differences. This
has been offset by the reduction in the future value of capital losses in
ReAssure Limited.
6 Deferred tax rate change relates primarily to movements in deferred tax
liabilities , which are expected to unwind at rates in excess of the current
year rate of 23.5%.
The standard rate of UK corporation tax for the half year ended 30 June 2023
is 23.5% (half year ended 30 June 2022: 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 for calculating deferred tax for the 2023 Interim Report. 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 2023 Year ended 31 December 2022
£m £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 48 82
Excess expenses and deferred acquisition costs 117 116
Intangibles 3 29
Capital losses 51 40
Actuarial liability differences between local GAAP and IFRS 17 5 27
The Group also has £295 million of BLAGAB (life business) trading losses
carried forward as at 30 June 2023 in Phoenix Life Limited and Phoenix Life
Assurance Limited (HY22: £nil). £173 million of gross losses are projected
to be utilised within these entities, however no value has been attributed in
relation to the losses given the interaction with other deductible temporary
differences (HY22: £nil). Deferred tax assets have not been recognised in
respect of the remaining £122 million (HY22: £nil) losses due to the
uncertainty of future BLAGAB trading profits arising against which the losses
could be offset (at entity level).
There is a technical matter which is currently being discussed with HMRC in
relation to the L&G insurance business transfer to ReAssure Limited. These
discussions are not sufficiently progressed at this stage for recognition of
any potential tax benefit arising.
A tax dispute with HMRC in relation to the tax treatment of an asset formerly
held by Guardian Assurance Limited (before the business was transferred to
ReAssure Limited) was resolved in favour of the Group in 2022. The year end
2022 financial statements included a release for the accrual for the tax under
dispute.
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.
8. 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 2023 Adjusted Financing Adjusted Other Total
operating
operating earnings net of financing costs
costs non-operating items
profit
£m £m £m £m £m
Profit/(loss) before the tax attributable to owners 266 (99) 167 (604) (437)
Tax credit attributable to owners 18 23 41 151 192
Profit/(loss) for the period attributable to owners 284 (76) 208 (453) (245)
Coupon paid on Tier 1 notes, net of tax relief - (11) (11) - (11)
Deduct: Share of result attributable to non-controlling interests - - - (16) (16)
Profit/(loss) for the period attributable to ordinary equity holders of the 284 (87) 197 (469) (272)
parent
Half year ended 30 June 2022 (restated) Adjusted Financing Adjusted Other Total
operating
operating earnings net of financing costs
non-operating items
costs
profit
£m £m £m £m £m
Profit/(loss) before the tax attributable to owners 254 (103) 151 (1,830) (1,679)
Tax (charge)/credit attributable to owners (3) 20 17 404 421
Profit/(loss) for the period attributable to owners 251 (83) 168 (1,426) (1,258)
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 251 (95) 156 (1,457) (1,301)
of the parent
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
Half year ended Half year ended
30 June 2023 Number million
30 June 2022 Number million
Issued ordinary shares at beginning of the period 1,000 1,000
Effect of non-contingently issuable shares in respect of Group's long-term 1 -
incentive plan
Own shares held by employee benefit trust (2) (2)
Weighted average number of ordinary shares 999 998
The diluted weighted average number of ordinary shares outstanding during the
period is 1,001 million (half year ended 30 June 2022: 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
1,736,066 shares for the half year ended 30 June 2023 (half year ended 30 June
2022: 2,606,242 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 both periods presented.
Earnings per share disclosures are as follows:
Half year ended Half year ended
30 June 2023 30 June 2022
restated
pence
pence
Basic earnings per share (27.1) (130.4)
Diluted earnings per share (27.1) (130.4)
Basic operating earnings net of financing costs per share 19.7 15.6
Diluted operating earnings net of financing costs per share 19.7 15.6
9. Dividends on ordinary shares
Half year ended 30 June 2023 Half year ended 30 June 2022
£m £m
Dividend declared and paid 260 248
On 10 March 2023, the Board recommended a final dividend of 26.0p per share in
respect of the year ended 31 December 2022. The dividend was approved at the
Company's Annual General Meeting, which was held on 4 May 2023. The dividend
amounted to £260 million and was paid on 10 May 2023.
10. Share capital
30 June 2023 31 December 2022
£m £m
Issued and fully paid:
1,001.1 million (30 June 2022: 1,000.0 million; 31 December 2022: 1000.4 100 100
million) ordinary shares of £0.10 each
Movements in share capital during the period:
2023 Number £
Shares in issue at 1 January 2023 1,000,352,477 100,035,247
Ordinary shares issued in the period 726,663 72,667
Shares in issue at 30June 2023 1,001,079,140 100,107,914
During the period, the Company issued 726,663 shares at a total premium of £4
million in order to satisfy its obligation to employees under the Group's
sharesave schemes.
2022 Number £
Shares in issue at 1 January 2022 999,536,058 99,953,605
Ordinary shares issued in the period 816,419 81,642
Shares in issue at 31 December 2022 1,000,352,477 100,035,247
During the year ended 31 December 2022, 816,419 shares were issued at a
premium of £4 million (in order to satisfy obligations to employees under the
Group's sharesave schemes.
11. Other reserves
2023 Cash flow hedging reserve Total other reserves
£m £m
At 1 January 2023 46 46
Other comprehensive income for the period 36 36
At 30 June 2023 82 82
2022 Owner-occupied property revaluation reserve Cash flow Total other reserves
hedging reserve
£m £m £m
At 1 January 2022 5 51 56
Other comprehensive expense for the period (5) (5) (10)
At 31 December 2022 - 46 46
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.
12. Non-controlling interests
APEOT
2023 £m
At 1 January 2023 532
Profit for the period 16
Dividends paid (5)
At 30 June 2023 543
APEOT
2022 £m
At 1 January 2022 460
Profit for the period 67
Dividends paid (10)
Increase in non-controlling interest 15
At 31 December 2022 532
The non-controlling interests of £543 million (year ended 31 December 2022:
£532 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 2023, the
Group held 53.6% of the issued share capital of APEOT (31 December 2022:
53.6%).
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.
13. 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, from 3 April 2023, the Sun Life
Assurance Company of Canada 1988 UK and Irish Employee Benefits scheme ('Sun
Life of Canada Scheme') as at 30 June 2023.
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 £22 million (31
December 2022: £23million). The carrying value of insurance policies effected
by the PGL Pension Scheme with the Group of £1,047 million (31 December 2022:
£1,079 million) 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 £1,025 million (31 December 2022: £1,056 million). The
value of the collateral assets disclosed within financial assets in the
condensed statement of consolidated financial position is £1,173 million (31
December 2022: £1,246 million).
In 2020, the Pearl Scheme entered into a Commitment Agreement with Pearl
Group Holdings (No.2) Limited to complete a series of buy-ins with PLL
scheduled to be executed by 31 December 2023. Four buy-in transactions have
been completed with the final tranche having been completed in November 2022.
A total of 100% of the Scheme's pensioner in-payment and deferred member
liabilities are now covered by the buy-in transactions, which transfer the
associated risks including longevity improvement risk to PLL.
In total, the Scheme has transferred £2,792 million of plan assets to PLL as
payment of premium and these assets 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 £49 million (31 December
2022: £46 million) and the carrying value of insurance policies eliminated on
consolidation were £1,479 million (31 December 2022: £1,501 million). The
net pension scheme liability of the Pearl Scheme amounted to £1,430million
(31 December 2022: £1,455 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.
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 £203 million (31 December 2022: £205
million).
During 2022, the Company reached an agreement for the removal of a trustee
discretion to pay some pension increases in excess of the 5% cap. The trustee
agreed to give up this discretion in exchange for a single 1.6% uplift for
current pensions in payment effective from 1 April 2022 and a 1.3% increase to
eligible benefits of both pension and deferred members effective from 1 April
2023. In the current period, the financial impact of the 1.3% uplift has been
to recognise an increase in the defined benefit obligation of £12 million and
a past service cost in the consolidated income statement (at 31 December 2022,
the financial impact of the 1.6% uplift was £15 million).
The pension scheme liability of the Abbey Life Staff Pension Scheme amounted
to £8 million (31 December 2022: £8 million). 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 £12
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 (31 December
2022: £14 million). The pension scheme liability of the ReAssure Private
Retirement Trust amounted to £1 million (31 December 2022: £1 million).
Following the acquisition of SLF of Canada UK Limited on 3 April 2023, the
Group's pension schemes now include the Sun Life of Canada Scheme. At 30 June
2023, the pension scheme asset of this scheme amounted to £16 million and the
reimbursement right assets, representing non-qualifying insurance policies,
were £2 million.
14. Insurance and reinsurance contract assets and liabilities
Insurance and reinsurance contracts as at 30 June 2023 and 31 December 2022
comprised:
− − 30 June 2023 − 31 December 2022
− − Assets − Liabilities − Assets − Liabilities
− − £m − £m − £m − £m
− Total insurance contracts issued − 47 − (110,591) − 48 − (107,608)
− − − − −
− Total reinsurance contracts held − 4,059 − - − 4,071 − (7)
The carrying amounts comprise of the present value of expected future cash
flows, a risk adjustment for non-financial risk and the contractual service
margin. A movement analysis of these components is provided in note 14.2 for
insurance contracts and note 14.3 for reinsurance contracts.
The risk adjustment, net of reinsurance, is summarised as follows:
At 1 January 2022 Risk expired in the period Other movements At 31 December 2022 Risk expired in the period Other movements At 30 June 2023
Insurance contracts issued £m £m £m £m £m £m £m
Annuities 1,316 (66) (372) 878 (35) (21) 822
Other products 405 (35) (151) 219 (10) 92 301
Gross risk adjustment 1,721 (101) (523) 1,097 (45) 71 1,123
Reinsurance contracts held
Annuities (553) 36 102 (415) 11 (66) (470)
Other products (107) 6 38 (63) 2 (13) (74)
Reinsurance risk adjustment (660) 42 140 (478) 13 (79) (544)
Net risk adjustment 1,061 (59) (383) 619 (32) (8) 579
Other movements in 2023 include the impact of new business written in the
period of £75 million, new reinsurance contracts initiated of £138 million
and the acquisition of the Sun Life of Canada UK business of £35 million.
The risk adjustment decreased over 2022 and 2023 as a result of significant
changes in discount rates.
The CSM, net of reinsurance, is summarised as follows:
At 1 January 2022 CSM recognised for services provided Other movements At 31 December 2022 CSM recognised for services provided Other movements At 30 June 2023
Insurance contracts issued £m £m £m £m £m £m £m
Annuities 2,918 (268) 529 3,179 (147) 472 3,504
Other products 539 (118) 299 720 (61) 35 694
Gross CSM 3,457 (386) 828 3,899 (208) 507 4,198
Reinsurance contracts held
Annuities (898) 83 (208) (1,023) 53 (238) (1,208)
Other products (129) 30 (183) (282) 12 (9) (279)
Reinsurance CSM (1,027) 113 (391) (1,305) 65 (247) (1,487)
Net CSM 2,430 (273) 437 2,594 (143) 260 2,711
The CSM increased in the period driven by new business written of £148
million, the acquisition of the Sun Life of Canada UK business of £52 million
and a positive impact of favourable assumption changes and demographic
experience, partially offset by the release to the income statement for
services provided.
14.1 Assumptions
Financial and non-financial assumptions are used to determine the insurance
and reinsurance contract liabilities. Financial assumptions are
market-consistent whereas non-financial assumptions are set from an entity
perspective. Details of the significant financial and non-financial
assumptions are detailed below.
14.1 .1 Discount rate
All cash flows are discounted using risk-free yield curves adjusted to reflect
the timing and liquidity characteristics of those cash flows. For the
risk-free yield curve the Group uses those published by the PRA and EIOPA for
regulatory reporting. Where necessary, yield curves are interpolated between
the last available market data point and the ultimate forward rate.
The Group uses a top-down approach primarily for annuities and a bottom-up
discount rate for all other business. Under the top-down approach, the
discount rate is determined from the yield implicit in the fair value of an
appropriate reference portfolio of assets that reflects the characteristics of
the liabilities. For annuity business, the Group determines the reference
portfolio based on the strategic asset allocation ('SAA') which aligns to the
strategic investment objectives of the Group. The SAA sets out the target
level of investment in a range of asset classes and the yield for these asset
classes is determined based on the fair value of assets in that class held at
the valuation date.
Adjustments are made for differences between the reference portfolio and the
insurance contract liability cash flows, including an allowance for credit
defaults. The credit default deduction comprises an allowance for both
expected and unexpected defaults and takes into consideration long-term
historical data on actual defaults and an allowance for variability around
these defaults. The credit default deduction is determined based on the assets
held at the valuation date.
The approach to determining unexpected defaults is based on a percentage of
spread less the expected default allowance. The percentage of spread was set
using a top-down view that took into consideration management's best estimate
as to the allocation of the spread between illiquidity factors and the risk of
default. Given the widening of spreads during 2022 resulting from
macro-economic conditions driven by the war in Ukraine and resulting food and
energy crises, surging inflation and the Mini Budget, this judgement became
more material. Since the beginning of 2022, the Group has been developing a
credit model for use in the Phoenix Solvency II Internal Model (subject to PRA
approval), which also provides a best estimate view of credit defaults. The
new model applies a stress to long-term historical actual default data to
determine the variability of defaults. From 30 June 2022, the new model has
been used as an input in determining the assumption for unexpected credit
defaults as it is considered to provide a more refined view of the variability
of defaults, particularly in volatile market conditions.
Under the bottom-up approach, the discount rate is determined as the risk-free
yield curve, adjusted for differences in liquidity characteristics by adding
an illiquidity premium. For with-profits business a single illiquidity premium
is determined for each fund based on the cash flow characteristics of the
contracts within the fund and applied to all contracts within the fund.
The tables below set out the yield curves used to discount the cash flows of
insurance contracts for major currencies.
Half year ended 30 June 2023 Risk-free rate (bps)
1 year 5 years 10 years 20 years 30 years
GBP 606 503 425 388 364
Euro 398 313 288 266 232
Liquidity premium over risk-free rate (bps)
Annuities GBP 149
Annuities Euro 45
With-profits GBP - liquid liabilities 20
With-profits Euro - liquid liabilities 20
With-profits GBP - illiquid liabilities 98 - 149
Half year ended 30 June 2022 Risk-free rate (bps)
1 year 5 years 10 years 20 years 30 years
GBP 249 252 236 227 217
Euro 74 169 209 217 182
Liquidity premium over risk-free rate (bps)
Annuities GBP 113
Annuities Euro 47
With-profits GBP - liquid liabilities 10
With-profits Euro - liquid liabilities 10
With-profits GBP - illiquid liabilities 75 - 113
Year ended 31 December 2022 Risk-free rate (bps)
1 year 5 years 10 years 20 years 30 years
GBP 446 406 371 354 335
Euro 318 313 309 276 229
Liquidity premium over risk-free rate (bps)
Annuities GBP 151
Annuities Euro 44
With-profits GBP - liquid liabilities 10
With-profits Euro - liquid liabilities 10
With-profits GBP - illiquid liabilities 100 - 151
14.1.2 Risk adjustment
The Group has used the confidence level technique to derive the risk
adjustment for non-financial risk. The risk adjustment percentile is
determined based on the Group's view of the compensation required in respect
of non-financial risk. The diversification benefit included in the risk
adjustment reflects diversification between contracts within the perimeter of
the Group's Internal Model. There is no diversification allowed for between
contracts measured under standard formula and the internal model. The risk
adjustment calibration is set at least annually, off-cycle, based on the
Group's current view of risk. The risk adjustment calculation is reassessed at
each reporting date, i.e. the risk adjustment is not locked-in at initial
recognition.
For with-profit business, the shareholder's portion of non-financial risks
(including an allowance for burn-through costs to the shareholder) is allowed
for in the derivation of the risk adjustment. For non-profit business held
within a with-profit fund, the risk adjustment takes into account the
compensation required by both the shareholder and the participating
policyholders.
Confidence level techniques are used to derive the overall risk adjustment for
non-financial risk and this is allocated down to each group of contracts in
accordance with their risk profiles. The confidence level percentile input
used to determine the risk adjustment is as follows:
Half year ended Year ended
30 June 2023
31 December 2022
Insurance contracts (gross of reinsurance) 80th 80th
14.2 Movements in present value of future cash flows, risk adjustment, CSM and loss component of insurance contracts
The reconciliations below provide a roll-forward of the net asset or liability
for insurance contracts issued showing estimates of the present value of
future cash flows, the risk adjustment for non-financial risk and the CSM in
each group of insurance contracts.
Where groups of insurance contracts are onerous, a loss component is
established. The loss component is established within the LRC and represents a
notional record of the losses recognised in the income statement. A separate
reconciliation of this loss component is also provided below.
Insurance contracts
Half year ended 30 June 2023 Estimates of the present value of future cash flows Risk Contractual service margin Total
adjustment
£m £m £m £m
Insurance contract liabilities as at 1 January 102,612 1,097 3,899 107,608
Insurance contract assets as at 1 January (48) - - (48)
Net insurance contract liabilities at 1 January 102,564 1,097 3,899 107,560
Acquisition of SLF Canada UK Limited (note 3.1) 4,245 69 72 4,386
Changes in profit or loss:
CSM recognised for services provided - - (208) (208)
Risk adjustment for the risk expired - (45) - (45)
Experience adjustments (1) - - (1)
Policyholder tax charges (12) - - (12)
Total change relating to current service (13) (45) (208) (266)
Contracts initially recognised in the period (215) 75 141 1
Changes in estimates that adjust the CSM (161) (94) 255 -
Changes in estimates that do not adjust the CSM (43) 66 - 23
Total change relating to future service (419) 47 396 24
Adjustments to liabilities for incurred claims (past service) (20) - - (20)
Insurance service result (452) 2 188 (262)
Insurance finance expense/(income) 396 (2) 29 423
Total changes in profit or loss (56) - 217 161
Cash flows:
Premiums received 4,464 - - 4,464
Claims and other expenses paid (5,334) - - (5,334)
Insurance acquisition cash flows (54) - - (54)
Total cash flows (924) - - (924)
Other movements (606) (43) 10 (639)
Net insurance contract liabilities as at 30 June 105,223 1,123 4,198 110,544
Insurance contract liabilities as at 30 June 105,270 1,123 4,198 110,591
Insurance contract assets as at 30 June (47) - - (47)
Net insurance contract liabilities as at 30 June 105,223 1,123 4,198 110,544
Included within the estimates of the present value of future cash flows at 30
June 2023 is £4,168 million (1 January 2023: £4,056 million) of with-profit
fund surpluses expected to be distributed to existing policyholders over time.
Year ended 31 December 2022 (restated) Estimates of the present value of future cash flows Risk Contractual service margin Total
adjustment
£m £m £m £m
Insurance contract liabilities as at 1 January 127,348 1,721 3,457 132,526
Changes in profit or loss:
CSM recognised for services provided - - (386) (386)
Risk adjustment for the risk expired - (101) - (101)
Experience adjustments 61 - - 61
Policyholder tax charge 35 - - 35
Total change relating to current service 96 (101) (386) (391)
Contracts initially recognised in the period (404) 132 279 7
Changes in estimates that adjust the CSM (412) (62) 474 -
Changes in estimates that do not adjust the CSM 499 19 - 518
Total change relating to future service (317) 89 753 525
Adjustments to liabilities for incurred claims (past service) (29) - - (29)
Insurance service result (250) (12) 367 105
Insurance finance (income)/expense (22,319) (615) 54 (22,880)
Total changes in profit or loss (22,569) (627) 421 (22,775)
Cash flows:
Premiums received 6,906 - - 6,906
Claims and other expenses paid (9,684) - - (9,684)
Insurance acquisition cash flows (129) - - (129)
Total cash flows (2,907) - - (2,907)
Other movements 692 3 21 716
Net insurance contract liabilities as at 31 December 102,564 1,097 3,899 107,560
Insurance contract liabilities as at 31 December 102,612 1,097 3,899 107,608
Insurance contract assets as at 31 December (48) - - (48)
Net insurance contract liabilities as at 31 December 102,564 1,097 3,899 107,560
Included within the estimates of the present value of future cash flows at 31
December 2022 is £4,056 million (1 January 2022: £5,433 million) of
with-profit fund surpluses expected to be distributed to existing
policyholders over time.
Insurance contracts Loss component
Half year ended Year ended 31 December 2022 (restated)
30 June 2023
£m £m
Loss component as at 1 January 656 137
Insurance service expenses:
Incurred claims and other expenses (51) (9)
Losses on onerous contracts and reversal of those losses 24 525
Insurance service result (25) 516
Insurance finance income 11 3
Total changes in profit or loss (14) 519
Loss component as at 30 June/31 December 642 656
14.3 Movements in present value of future cash flows, risk adjustment, CSM and loss-recovery component of reinsurance contracts held
The reconciliations below provide a roll-forward of the net asset or liability
for reinsurance contracts held showing estimates of the present value of
future cash flows, the risk adjustment for non-financial risk and the CSM in
each group of reinsurance contracts.
A reconciliation of the loss recovery component is also provided.
Reinsurance contracts held
Estimates of the present value of future cash flows Risk Contractual service margin Total
adjustment
Half year ended 30 June 2023 £m £m £m £m
Reinsurance contract liabilities as at 1 January - - (7) (7)
Reinsurance contract assets as at 1 January 2,281 478 1,312 4,071
Net reinsurance contract assets as at 1 January 2,281 478 1,305 4,064
Acquisition of SLF Canada UK Limited (note 3.1) (207) 34 20 (153)
Changes in profit of loss
CSM recognised for services received - - (65) (65)
Risk adjustment for the risk expired - (13) - (13)
Experience adjustments (36) - - (36)
Total change relating to current service (36) (13) (65) (114)
Contracts initially recognised in the period (131) 138 (7) -
Changes in estimates that adjust the CSM (179) (39) 218 -
Changes in estimates that do not adjust the CSM - (6) - (6)
Total change relating to future service (310) 93 211 (6)
Net expenses from reinsurance contracts (346) 80 146 (120)
.
Reinsurance finance (expense)/income (135) (15) 11 (139)
Total changes in profit or loss (481) 65 157 (259)
Cash flows:
Premiums paid 1,209 - - 1,209
Claims recovered and other expenses paid (906) - - (906)
Total cash flows 303 - - 303
Other movements 132 (33) 5 104
Reinsurance contract assets as at 30 June 2,028 544 1,487 4,059
Reinsurance contracts held
Estimates of the present value of future cash flows Risk Contractual service margin Total
adjustment
Year ended 31 December 2022 (restated) £m £m £m £m
Reinsurance contract assets as at 1 January 3,033 660 1,027 4,720
CSM recognised for services received - - (113) (113)
Risk adjustment for the risk expired - (42) - (42)
Experience adjustments (14) - - (14)
Total change relating to current service (14) (42) (113) (169)
Contracts initially recognised in the period (193) 120 73 -
Changes in estimates that adjust the CSM (278) 5 273 -
Changes in estimates that do not adjust the CSM 1 (5) - (4)
Total change relating to future service (470) 120 346 (4)
Adjustments to liabilities for incurred claims (past service) 11 - - 11
Net expenses from reinsurance contracts (473) 78 233 (162)
Reinsurance finance (expense)/income (810) (260) 18 (1,052)
Total changes in profit or loss (1,283) (182) 251 (1,214)
Cash flows:
Premiums paid 1,656 - - 1,656
Claims recovered and other expenses paid (1,090) - - (1,090)
Total cash flows 566 - - 566
Transfer to other items in the statement of financial position - - - -
Other movements (35) - 27 (8)
Net reinsurance contract assets/(liabilities) as at 31 December 2,281 478 1,305 4,064
Reinsurance contract liabilities as at 31 December - - (7) (7)
Reinsurance contract assets as at 31 December 2,281 478 1,312 4,071
Net reinsurance contract assets as at 31 December 2,281 478 1,305 4,064
Reinsurance contracts held
Loss recovery component
Half year ended Year ended 31 December 2022 restated
30 June 2023
£m £m
Loss recovery component as at 1 January (46) (52)
Reinsurance expenses:
Claims recoverable and other expenses incurred 1 3
Recognition and reversals of loss-recovery from onerous underlying contracts 6 4
Net income or expense from reinsurance contracts 7 7
Reinsurance finance income (1) (1)
Total changes in profit or loss 6 6
Loss recovery component as at 30 June/31 December (40) (46)
15. Borrowings
30 June 2023 31 December 2022
£m £m
Carrying value
£300 million multi-currency revolving credit facility 100 62
Property reversions loan 56 64
Total policyholder borrowings 156 126
£428 million Tier 2 subordinated notes 427 427
£450 million Tier 3 subordinated notes - -
US $500 million Tier 2 notes 392 413
€500 million Tier 2 notes 425 439
US $750 million Contingent Convertible Tier 1 notes 588 618
£500 million Tier 2 notes 488 487
US $500 million Fixed Rate Reset Tier 2 notes 392 412
£500 million 5.867% Tier 2 subordinated notes 540 543
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 256 259
£250 million 4.016% Tier 3 subordinated notes 255 256
Total shareholder borrowings 3,763 3,854
Total borrowings 3,919 3,980
During the period, the Group increased the amount of its unsecured revolving
credit facility from £1.25 billion to £1.75 billion. The terms of the
facility remain unchanged and it continues to mature in June 2026 and accrues
interest at a margin over SONIA that is based on credit rating. The facility
remained undrawn as at 30 June 2023.
On 15 September 2023, the Group entered into a further contingent £300
million unsecured loan facility that matures in September 2024. The loan
facility accrues interest at a margin over SONIA based on the timeframe by
which any drawn amounts remain outstanding.
16. Financial instruments
16.1 Fair values
The table below sets out a comparison of the carrying amounts and fair values
of financial instruments.
30 June 2023
Carrying value Fair value
£m £m
Financial assets measured at carrying and fair value
Financial assets at fair value through profit or loss (FVTPL) (mandatory):
Loans and deposits 202 202
Derivatives 3,281 3,281
Equities 87,056 87,056
Investment in associate 273 273
Debt securities 87,310 87,310
Collective investment schemes 74,387 74,387
Reinsurers' share of investment contract liabilities 9,167 9,167
Financial assets measured at amortised cost:
Loans and deposits 13 13
Total financial assets 261,689 261,689
Less amounts classified as held for sale (see note 3.2) (4,363) (4,363)
Total financial assets less amounts classified as held for sale 257,326 257,326
31 December 2022
Restated Carrying value Fair value
£m £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Derivatives 4,071 4,071
Financial assets designated at FVTPL upon initial recognition:
Equities 76,780 76,780
Investment in associate 329 329
Debt securities 84,710 84,710
Collective investment schemes 78,353 78,353
Reinsurers' share of investment contract liabilities 9,090 9,090
Financial assets measured at amortised cost:
Loans and deposits 268 268
Total financial assets 253,601 253,601
Less amounts classified as held for sale (see note 3.2) (4,629) (4,629)
Total financial assets less amounts classified as held for sale 248,972 248,972
30 June 2023 31 December 2022
Carrying Fair Carrying Fair
value value value value
restated restated
£m £m £m £m
Financial liabilities measured at carrying and fair values
Financial liabilities at FVTPL (mandatory):
Derivatives 4,730 4,730 5,879 5,879
Financial liabilities designated upon initial recognition:
Borrowings 56 56 64 64
Net asset value attributable to unit holders 2,965 2,965 3,042 3,042
Investment contract liabilities 155,354 155,354 149,481 149,481
Financial liabilities measured at amortised cost:
Borrowings 3,863 3,533 3,916 3,644
Obligations for repayment of collateral received 973 973 1,706 1,706
Total financial liabilities 167,941 167,611 164,088 163,816
Less amounts classified as held for sale (see note 3.2) (7,841) (7,841) (8,316) (8,316)
Total financial liabilities less amounts classified as held for sale 160,100 159,770 155,772 155,500
16.2 Fair value hierarchy
16.2.1 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 and reinsurers' share of investment contract liabilities,
fair value is determined 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. The fair value of investment contract liabilities reflects
the fair value of the underlying assets and liabilities in the funds plus an
additional amount to cover the present value of the excess of future policy
costs over future charges. Their liabilities are consequently determined to be
Level 2 instruments.
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.
16.2.2 Fair value hierarchy of financial instruments measured at fair value
At 30 June 2023
Level 1 Level 2 Level 3 Total
fair value
£m £m £m £m
Financial assets measured at fair value
Financial assets at FVTPL (mandatory):
Loan and deposits - 196 6 202
Derivatives 219 2,891 171 3,281
Equities 84,713 94 2,249 87,056
Investment in associate 273 - - 273
Debt securities 45,729 29,308 12,273 87,310
Collective investment schemes 71,033 2,989 365 74,387
Reinsurers' share of investment contract liabilities 9,167 - - 9,167
Total financial assets measured at fair value 211,134 35,478 15,064 261,676
Less amounts classified as held for sale (see note 3.2) (3,396) (191) (776) (4,363)
Total financial assets measured at fair value, excluding amounts classified as 207,738 35,287 14,288 257,313
held for sale
Level 1 Level 2 Level 3 Total
fair value
£m £m £m £m
Financial liabilities measured at fair value
Financial liabilities at FVTPL (mandatory):
Derivatives 170 4,318 242 4,730
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 56 56
Net asset value attributable to unit holders 2,965 - - 2,965
Investment contract liabilities - 155,354 - 155,354
Total financial liabilities measured at fair value 3,135 159,672 298 163,105
Less amounts classified as held for sale (see note 3.2) - (7,841) - (7,841)
Total financial liabilities measured at fair value less amounts classified as 3,135 151,831 298 155,264
held for sale
At 31 December 2022
Level 1 Level 2 Level 3 Total fair value
Restated £m £m £m £m
Financial assets measured at fair value
Financial assets at fair value through profit and loss:
Derivatives 165 3,754 152 4,071
Financial assets designated at FVTPL upon initial recognition:
Equities 74,464 124 2,192 76,780
Investment in associate 329 - - 329
Debt securities 48,151 25,094 11,465 84,710
Collective investment schemes 75,962 2,079 312 78,353
Reinsurers' share of investment contract liabilities 9,090 - - 9,090
Total financial assets measured at fair value 208,161 31,051 14,121 253,333
Less amounts classified as held for sale (see note 3.2) (3,661) (179) (789) (4,629)
Total financial assets measured at fair value, excluding amounts classified as 204,500 30,872 13,332 248,704
held for sale
Level 1 Level 2 Level 3 Total fair value
Restated £m £m £m £m
Financial liabilities measured at fair value
Financial liabilities at fair value through profit and loss:
Derivatives 98 5,538 243 5,879
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 64 64
Net asset value attributable to unit holders 3,042 - - 3,042
Investment contract liabilities - 149,481 - 149,481
Total financial liabilities measured at fair value 3,140 155,019 307 158,466
Less amounts classified as held for sale (see note 3.2) - (8,316) - (8,316)
Total financial liabilities measured at fair value, excluding amounts 3,140 146,703 307 150,150
classified as
held for sale
16.2.3 Significant inputs and input values for Level 3 financial instruments
Valuation technique Key unobservable input value
Description Significant inputs 30 June 2023 31 December 2022
Equities Single broker(1) and net asset value(2) Single broker N/A N/A
indicative price
Debt securities (see 16.2.4 for further details)
Loans guaranteed by export credit agencies & supranationals DCF model(3) Credit spread 79bps 111bps
(weighted average)
(weighted average)
Private corporate credit DCF model(3) Credit spread 181bps 169bps
(weighted average)
(weighted average)
Infrastructure loans DCF model(3) Credit spread 198bps 220bps
(weighted average)
(weighted average)
Loans to housing associations DCF model(3) Credit spread 121bps 164bps
(weighted average)
(weighted average)
Local authority loans DCF model(3) Credit spread 122bps 137bps
(weighted average)
(weighted average)
Equity Release Mortgage loans ('ERM') DCF model and Black-Scholes model(4) Spread 230bps over the IFRS reference curve 260bps over the IFRS reference curve
House price inflation +75bps adjustment +75bps adjustment
to RPI
to RPI
House price exposure £288,386 (average) £304,088 (average)
Mortality Average life expectancy of a male and female currently aged 75 is 14.6 years Average life expectancy of a male and female currently aged 75 is 14.5 years
and 16 years respectively and 15.9 years respectively
Voluntary redemption rate 150bps to 700bps 150bps to 700bps
Commercial real estate loans DCF model(3) Credit spread 253bps 253bps
(weighted average)
(weighted average)
Income strips(5) Income capitalisation Credit spread 595bps 661bps
Collective investment schemes Net asset value statements(2) N/A N/A N/A
Borrowings
Property reversions loans (see note 15) Internally developed model Mortality rate 130% IFL92C15 (Female)(6) 130% IFL92C15 (Female)(6)
130% IML92C15 130% IML92C15
(Male)(6)
(Male)(6)
House price inflation 3 year RPI rate 3 year RPI rate
plus 75bps
plus 75bps
Discount rate 3 year swap rate plus 3 year swap rate plus
170bps 170bps
Deferred possession rate 370bps 370bps
Derivative assets and liabilities
Forward private placements, infrastructure DCF model(3) Credit spread 128bps 145bps
and local authority loans(7)
(weighted average)
(weighted average)
Longevity swaps(8) DCF model(3) Swap curve swap curve + 36bps swap curve + 36bps
Equity Release Income Plan total return swap(9) DCF model(3) Credit spread 500bps 500bps
1 Broker indicative prices: Although such valuations are sensitive to
estimates, it is believed that changing one or more of the assumptions to
reasonably possible alternative assumptions would not change the fair value
significantly.
2 Net asset value statements: Net asset statements are provided by
independent third parties, and therefore no significant non-observable input
or sensitivity information has been prepared for those instruments valued on
this basis.
3 Discounted cash flow ('DCF') model: Except where otherwise stated, the
discount rate used is based on a risk-free curve and a credit spread. The
risk-free rate is taken from an appropriate gilt of comparable duration. The
spread is derived from a basket of comparable securities.
4 ERM loans: The loans are valued using a DCF 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.
5 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 45-75 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.
6 IFL92C15 and IML92C15 relate to immediate annuitant female and male
lives and refer to the 92 series mortality tables produced by the Continuous
Mortality Investigation ('CMI').
7 Derivative liabilities include forward investments of £134 million (31
December 2022: £146 million) which include a commitment to acquire or provide
funding for fixed rate debt instruments at specified future dates.
8 Included within derivative assets and liabilities are longevity swap
contracts with corporate pension schemes with a fair value of £171 million
(31 December 2022: £152 million) and £53 million (31 December 2022: £34
million) respectively.
9 Included within derivative liabilities is the Equity Release Income
Plan ('ERIP') total return swap with a value of £54 million (31 December
2022: £63 million), under which a share of the disposal proceeds arising on a
portfolio of property reversions is payable to a third party.
16.2.4 Level 3 debt securities
30 June 31 December
2023 2022
Analysis of Level 3 debt securities £m £m
Unquoted corporate bonds:
Loans guaranteed by export credit agencies & supra-nationals 472 402
Private corporate credit 1,563 1,422
Infrastructure loans - project finance 895 882
Infrastructure loans-corporate 1,207 1,175
Loans to housing associations 970 691
Local authority loans 829 596
Equity release mortgages 4,099 3,934
Commercial real estate loans 977 1,104
Income strips 773 786
Bridging loans to private equity funds 479 462
Other 9 11
Total Level 3 debt securities 12,273 11,465
Less amounts classified as held for sale (773) (786)
Total Level 3 debt securities excluding amounts classified as held for sale 11,500 10,679
16.2.5 Level 3 financial instrument sensitivities
Sensitivities of level 3 financial instruments 30 June 2023 31 December 2022
£m
£m
Debt securities - Loans guaranteed by export credit agencies &
supranationals
65bps increase in spread (12) (9)
65bps decrease in spread 13 11
Debt securities - Private corporate credit
65bps increase in spread (92) (98)
65bps decrease in spread 117 112
Debt securities - Infrastructure loans
65bps increase in spread (100) (103)
65bps decrease in spread 103 107
Debt securities - Loans to housing associations
65bps increase in spread (61) (54)
65bps decrease in spread 73 58
Debt securities - Local authority loans
65bps increase in spread (69) (51)
65bps decrease in spread 75 55
Debt securities - ERM loans
100bps increase in spread (341) (329)
100bps decrease in spread 380 370
5% increase in mortality 13 13
5% decrease in mortality (14) (14)
15% increase in voluntary redemption rate 45 49
15% decrease in voluntary redemption rate (49) (52)
1% increase in house price inflation 36 27
1% decrease in house price inflation (53) (42)
10% increase in house prices 29 22
10% decrease in house prices (47) (38)
Debt securities - CRELs
65bps increase in spread (26) (18)
65bps decrease in spread 27 19
Debt securities - Income strips
35bps increase in spread (63) (76)
35bps decrease in spread 75 88
Derivatives - Forward private placements, infrastructure and local authority
loans(1)
65bps increase in spread (16) (30)
65bps decrease in spread 17 31
Derivatives - Longevity swap contracts
100bps increase in swap curve (15) (17)
100bps decrease in swap curve 19 21
Derivatives - Equity Release Income Plan total return swap
100bps increase in spread 1 2
100bps decrease in spread (1) (2)
For the property reversions loans and bridging loans to equity funds, there
are no reasonably possible movements in unobservable input values which would
result in a significant movement in the fair value of the financial
instruments.
For those assets valued using net asset value statements (equities and
collective investment schemes) no sensitivity information has been prepared as
the net asset statements are provided by independent third parties.
16.2.6 Transfers of financial instruments between Level 1 and Level 2
At 30 June 2023
From Level 1 to Level 2 From Level 2 to Level 1
£m £m
Financial assets measured at fair value
Financial assets mandatorily at FVTPL:
Equities 23 8
Collective investment schemes(1) 1,074 9
Debt securities 1,286 863
(1) As a result of the assessment of the liquidity of the underlying
investments held within collective investment schemes, in accordance with the
Group's fair value hierarchy classification methodology a net £1,065 million
of collective investment schemes has transferred from Level 1 to Level 2.
At 31 December 2022
From Level 1 to Level 2 From Level 2 to Level 1
£m £m
Financial assets measured at fair value:
Derivatives 48 -
Financial assets designated at FVTPL upon initial recognition:
Equities 73 5
Collective investment schemes 28 -
Debt securities 1,478 1,267
Consistent with the prior periods, 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.
16.2.7 Movement in Level 3 financial instruments measured at fair value
30 June 2023
At Reclassification At 1 January 2023 restated Net (losses)/ Effect of acquisition/ purchases Sales Transfers from Level 1 and Level 2 Transfers to Level 1 and Level 2 At 30 June Unrealised (losses)/
1 January 2023
on transition gains in income statement 2023(2) gains on assets held at end of period
to IFRS9(1)
£m £m £m £m £m £m £m £m £m £m
Financial assets measured at fair value
Financial assets at FVTPL (mandatory):
Loans and deposits - 7 7 (1) - - - - 6 -
Derivatives 152 - 152 19 - - - - 171 19
Equities 2,192 - 2,192 41 189 (173) - - 2,249 (9)
Debt securities 11,465 - 11,465 (225) 3,391 (2,508) 150 - 12,273 (185)
Collective investment schemes 312 - 312 7 52 (5) - (1) 365 7
Total financial assets measured at fair value 14,121 7 14,128 (159) 3,632 (2,686) 150 (1) 15,064 (168)
1 See note 2.2.1 for further details.
2 Total financial assets of £15,064 million includes £776 million of assets
classified as held for sale.
At 1 January 2023 Net losses in income statement Effect of purchases Sales/ Repayments 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
2023
£m £m £m £m £m £m £m £m
Financial liabilities measured at fair value
Financial liabilities at FVTPL (mandatory):
Derivatives 243 8 - (9) - - 242 3
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 64 1 - (9) - - 56 1
Total financial liabilities measured at fair value 307 9 - (18) - - 298 4
31 December 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 31 December 20221 Unrealised (losses)/gains on assets held at end of period
£m £m £m £m £m £m £m £m
Financial assets measured at fair value
Derivatives 237 (85) - - - - 152 (85)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,899 177 438 (369) 47 - 2,192 12
Debt securities 12,452 (3,544) 6,838 (4,277) 2 (6) 11,465 (3,595)
Collective investment schemes 286 (79) 108 (3) - - 312 (73)
Total financial assets measured at fair value 14,874 (3,531) 7,384 (4,649) 49 (6) 14,121 (3,741)
(1) Total financial assets of £14,121 million includes £789 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 31 December 2022 Unrealised losses on liabilities held
at end of period
repayments
£m £m £m £m £m £m £m £m
Financial liabilities measured at fair value
Derivatives 125 130 - (12) - - 243 123
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 70 9 - (15) - - 64 9
Total financial liabilities measured at fair value 195 139 - (27) - - 307 132
17. 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 2023 Half year ended 30 June 2022
£m restated(1)
£m
Loss for the period before tax (372) (2,147)
Adjustments for non-cash movements in loss for the period before tax:
Gain on acquisition of SLF Canada UK Limited (note 3.1) (66) -
Fair value losses/(gains) on:
Investment property 46 (482)
Financial assets and derivative liabilities (325) 36,021
Change in fair value of borrowings (84) 154
Amortisation and impairment of intangible assets 161 175
Share-based payment charge 10 8
Finance costs 134 116
Net interest expense on Group defined benefit pension scheme liability/asset 61 27
Pension past service costs 12 -
Other costs of pension schemes 3 3
Movements in assets and liabilities relating to operations:
(Increase)/decrease in investment assets (2,046) 4,861
(Increase)/decrease in reinsurers' share of investment contract (76) 1,319
liabilities
(Increase)/decrease in net reinsurance contract assets (148) 235
Decrease in insurance contract assets and liabilities (1,399) (17,681)
Increase/(decrease) in investment contract liabilities 3,173 (16,347)
Decrease in assets classified as held for sale 376 949
Decrease in obligation for repayment of collateral received (735) (1,799)
Decrease in liabilities classified as held for sale (491) (1,254)
Net decrease/(increase) in working capital 1,509 (2,025)
Other cash movements relating to operations:
Contributions to defined benefit pension schemes (5) (5)
Cash (utilised)/generated by operations (262) 2,128
(1) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details).
18. Related party transactions
The nature of the related party transactions of the Group has not changed from
those referred to in the Group's consolidated financial statements for the
year ended 31 December 2022.
There were no transactions with related parties during the half year ended 30
June 2023 which have had a material effect on the results or financial
position of the Group.
19. 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.
20 Events after the reporting date
On 15 September 2023, the Board declared an interim dividend per share of
26.0p for the half year ended 30 June 2023 (half year ended 30 June 2022:
24.8p; year ended 31 December 2022: 26.0p). The cost of this dividend has not
been recognised as a liability in the interim financial statements for the
half year ended 30 June 2023 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 2023
Shareholder and non-profit funds(1) Participating supported(1) Participating non-supported(2) Unit-linked(2) Total
Carrying value £m £m £m £m £m
Cash and cash equivalents 4,961 951 5,374 8,391 19,677
Debt securities - gilts and foreign government bonds 5,991 272 14,491 13,658 34,412
Debt securities - other government and 1,881 246 2,068 3,136 7,331
supranationals
Debt securities - infrastructure loans - project finance(3) 933 - - - 933
Debt securities - infrastructure loans - corporate(4) 1,237 - 1 - 1,238
Debt securities - local authority loans(5) 924 - 2 4 930
Debt securities - loans guaranteed by export credit agencies and 574 - - - 574
supranationals(6)
Debt securities - private corporate credit(7) 1,794 - 99 8 1,901
Debt securities - loans to housing associations(8) 1,046 - 7 2 1,055
Debt securities - commercial real estate loans(9) 977 - - - 977
Debt securities - equity release mortgages(9) 4,099 - - - 4,099
Debt securities - other debt securities 14,649 1,095 11,635 23,195 50,574
34,105 1,613 28,303 40,003 104,024
Equity securities 116 48 17,210 109,176 126,550
Property investments 61 19 1,669 5,499 7,248
Income strips(9) - - - 773 773
Other investments(10) (719) (723) 475 9,536 8,569
Total Life Company assets 38,524 1,908 53,031 173,378 266,841
Less assets held by disposal groups(11) - - - (7,839) (7,839)
At 30 June 2023 38,524 1,908 53,031 165,539 259,002
Cash and cash equivalents in Group holding companies(12) 246
Cash and financial assets in other Group companies 870
Financial assets held by the non-controlling interest in consolidated 3,405
collective investment schemes
Financial assets in consolidated funds held by disposal groups(11) 1,035
Total Group consolidated assets excluding amounts classified as held for sale 264,558
Comprised of:
Investment property 3,904
Financial assets 257,326
Cash and cash equivalents 8,055
Derivative liabilities (4,727)
264,558
(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 £933 million
include £895 million classified as Level 3 debt securities in the fair value
hierarchy.
(4. ) Total infrastructure loans - corporate of £1,238 million
include £1,207 million classified as Level 3 debt securities in the fair
value hierarchy.
(5. ) Total local authority loans of £930 million include £829
million classified as Level 3 debt securities in the fair value hierarchy.
(6. ) Total loans guaranteed by export credit agencies and
supranationals of £574 million include £472 million classified as Level 3
debt securities in the fair value hierarchy.
(7. ) Total private corporate credit of £1,901 million include
£1,563 million classified as Level 3 debt securities in the fair value
hierarchy.
(8. ) Total loans to housing associations of £1,055 million
include £970 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 other loans of £183 million, net derivative
liabilities of £(1,368) million, reinsurers' share of investment contracts of
£9,167 million and other investments of £587 million.
(11. ) See note 3.2 to the consolidated interim financial statements
for further details.
(12. ) Does not show the proforma view of cash disclosed on page 7 of
the interim report & accounts.
31 December 2022 restated(1)
Shareholder and non-profit funds(2) Participating supported(2) Participating non-supported(3) Unit-linked(3) Total
Carrying value £m £m £m £m £m
Cash and cash equivalents 4,385 1,027 5,312 6,445 17,169
Debt securities - gilts and foreign government bonds 4,913 260 15,065 13,212 33,450
Debt securities - other government and 1,691 242 1,717 2,341 5,991
supranationals
Debt securities - infrastructure loans - project finance(4) 922 - - - 922
Debt securities - infrastructure loans - corporate(5) 1,205 - 1 - 1,206
Debt securities - local authority loans(6) 686 1 2 4 693
Debt securities - loans guaranteed by export credit agencies and 509 - - - 509
supranationals(7)
Debt securities - private corporate credit(8) 1,660 - 100 8 1,768
Debt securities - loans to housing associations(9) 769 - 8 2 779
Debt securities - commercial real estate loans(10) 1,104 - - - 1,104
Debt securities - equity release mortgages(10) 3,934 - - - 3,934
Debt securities - other debt securities 13,895 1,118 13,067 33,515 61,595
31,288 1,621 29,960 49,082 111,951
Equity securities 109 46 17,114 94,462 111,731
Property investments 68 22 1,698 5,361 7,149
Income strips(10) - - - 786 786
Other investments(11) (1,241) (508) 732 9,273 8,256
Total Life Company assets 34,609 2,208 54,816 165,409 257,042
Less assets held by disposal groups(12) - - - (8,312) (8,312)
At 31 December 2022 34,609 2,208 54,816 157,097 248,730
Cash and cash equivalents in Group holding companies 502
Cash and financial assets in other Group companies 1,071
Financial assets held by the non-controlling interest in consolidated 4,213
collective investment schemes
Financial assets in consolidated funds held by disposal groups(12) 1,147
Total Group consolidated assets excluding amounts classified as held for sale 255,663
Comprised of:
Investment property 3,727
Financial assets 248,972
Cash and cash equivalents 8,839
Derivative liabilities (5,875)
255,663
(1. ) Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note 2 for further details). This has resulted in a
net reduction of £(9) million as result of moving £(11) million policy loans
to insurance contracts along with a £2 million increase in reinsurance share
of investment contracts.
(2. ) Includes assets where shareholders of the life companies bear the
investment risk.
(3. ) Includes assets where policyholders bear most of the investment risk.
(4. ) Total infrastructure loans - project finance of £922 million include
£882 million classified as Level 3 debt securities in the fair value
hierarchy.
(5. ) Total infrastructure loans - corporate of £1,206 million include
£1,175 million classified as Level 3 debt securities in the fair value
hierarchy.
(6. ) Total local authority loans of £693 million include £596 million
classified as Level 3 debt securities in the fair value hierarchy.
(7. ) Total loans guaranteed by export credit agencies and supranationals
of £509 million include £402 million classified as Level 3 debt securities
in the fair value hierarchy.
(8. ) Total private corporate credit of £1,768 million include £1,422
million classified as Level 3 debt securities in the fair value hierarchy.
(9. ) Total loans to housing associations of £779 million include £691
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 other loans of £398 million, net derivative liabilities of
£(1,837) million, reinsurers' share of investment contracts of £9,090
million and other investments of £605 million.
(12. ) See note 3.2 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 12.
At 30 June At 31 December 2022
2023 £bn
£bn
Total Life Company assets excluding amounts classified as held for sale 259.0 248.7
Off-balance sheet AUA(1) 10.0 10.3
Assets Under Administration 269.0 259.0
(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 IFRS 9 Financial Instruments, 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:
AAA AA A BBB BB & below(1) Total
Sector analysis of shareholder debt portfolio £m £m £m £m £m £m
Industrials - 422 210 660 15 1,307
Basic materials 17 1 146 31 - 195
Consumer, cyclical - 310 318 113 18 759
Technology and telecoms 181 293 705 583 1 1,763
Consumer, non-cyclical 239 303 795 218 - 1,555
Structured finance - - 37 - - 37
Banks(2) 455 522 2,952 385 58 4,372
Financial services 126 564 135 76 14 915
Diversified - 4 17 - - 21
Utilities - 228 959 1,485 9 2,681
Sovereign, sub-sovereign and supranationals(3) 1,274 6,690 548 115 - 8,627
Real estate 22 548 2,936 929 84 4,519
Investment companies 1 103 7 - - 111
Insurance 20 256 182 162 77 697
Oil and gas - 253 314 66 - 633
Collateralised debt obligations 18 18 18 4 - 58
Private equity loans - - 17 99 - 116
Equity release mortgages(4) 2,274 882 857 86 - 4,099
Infrastructure loans - 100 81 1,288 171 1,640
At 30 June 2023 4,627 11,497 11,234 6,300 447 34,105
(1) Includes unrated holdings of £67 million.
(2) The £4,372 million total shareholder exposure to bank debt comprised
£3,401 million senior debt and £971 million subordinated debt.
(3) Includes £634 million reported as local authority loans and £121
million reported as loans guaranteed by export credit agencies and
supranationals in the summary table on page 86.
(4) The credit ratings attributed to equity release mortgages are based on
the ratings assigned to the internal securitised loan notes.
AAA AA A BBB BB & below(1) Total
Sector analysis of shareholder debt portfolio £m £m £m £m £m £m
Industrials - 395 252 643 11 1,301
Basic materials - 1 130 6 - 137
Consumer, cyclical - 311 314 111 67 803
Technology and telecoms 186 288 517 551 - 1,542
Consumer, non-cyclical 246 328 802 231 - 1,607
Structured finance - - 38 - - 38
Banks(2) 526 464 2,919 344 39 4,292
Financial services 139 401 100 68 19 727
Diversified - 5 29 - - 34
Utilities 19 141 727 1,353 - 2,240
Sovereign, sub-sovereign and supranational(3) 932 5,838 509 116 2 7,397
Real estate 76 234 2,590 1,053 180 4,133
Investment companies 1 125 - 5 - 131
Insurance 22 354 321 70 43 810
Oil and gas - 132 346 55 - 533
Collateralised debt obligations - 7 - - - 7
Private equity loans - - 7 69 - 76
Equity release mortgages(4) 2,216 852 810 56 - 3,934
Infrastructure loans - 123 60 1,208 155 1,546
At 31 December 2022 4,363 9,999 10,471 5,939 516 31,288
(1) Includes unrated holdings of £108 million.
(2) The £4,292 million total shareholder exposure to bank debt comprised
£3,345 million senior debt and £947 million subordinated debt.
(3) Includes £686 million reported as local authority loans and £107
million reported as loans guaranteed by export credit agencies and
supranationals in the summary table on page 87.
(4) The credit ratings attributed to equity release mortgages are based on
the ratings assigned to the internal securitised loan notes.
Additional Capital Disclosures
PGH plc Solvency II Surplus
The estimated PGH plc surplus at 30 June 2023 is £3.9 billion (31 December
2022: £4.5 billion).
30 June 2023 Estimated 31 December 2022
£bn £bn
Own Funds 10.3 11.1
SCR (6.4) (6.6)
Surplus 3.9 4.5
The Eligible Own Funds reflects a dynamic recalculation of TMTP. Had this not
been performed, the surplus would have been £4 million lower.
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 2023 Estimated 31 December 2022
£bn £bn
Tier 1 - Unrestricted 6.1 6.8
Tier 1 - Restricted 1.1 1.1
Tier 2 2.6 2.6
Tier 3 0.5 0.6
Total Own Funds 10.3 11.1
PGH plc's unrestricted Tier 1 capital accounts for 59% (31 December 2022: 61%)
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 2022: £0.2 billion) and the deferred tax asset of £0.3 billion (31
December 2022: £0.4 billion).
Breakdown of SCR
The Group operates one single 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 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 2023 Estimated 31 December 2022
Internal Model ReAssure and SLIDAC Internal Model ReAssure and SLIDAC
Standard Formula Standard Formula
% % % %
Longevity 15 11 15 17
Credit 18 19 17 19
Persistency 19 32 18 28
Interest rates 6 2 8 6
Operational 8 5 8 4
Swap spreads 2 - 2 -
Property 5 1 4 1
Other market risks 14 17 15 14
Other non-market risks 13 13 13 11
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 €4.0 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 2023 is £2.1 billion (31 December 2022: £2.3
billion).
PGH plc's Eligible Own Funds to cover the MGSCR is £7.3 billion (31 December
2022: £8.2 billion) leaving an excess of Eligible Own Funds over MGSCR of
£5.2 billion (31 December 2022: £5.9 billion), which transfers to an MGSCR
coverage ratio of 349% (31 December 2022: 361%).
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 88.
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 leverage ratio 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
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 33 and 34 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 74.
defined as the sum of equity attributable to the owners of the parent, funding costs and financial flexibility for future acquisitions.
non-controlling interests, contractual service margin ('CSM') (net of tax),
policyholders' share of the estate and the Tier 1 Notes.
Incremental long-term cash generation 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
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 Free Surplus 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 9 for further analysis of the
approved capital according to their capital management policies. Companies that is available for distribution to the holding companies, and the solvency positions of the Life Companies.
generation of Free Surplus underpins future operating cash generation.
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 74.
APM Definition Why this measure is used Reconciliation to financial statements
Net fund flows Represents the aggregate net position of gross AUA inflows less gross Net fund flows provides a measure of the Group's ability to deliver new Net fund flows is not directly reconcilable to
outflows. It is an in-year movement in the Group's AUA. business growth.
the financial statements as it represents an in-year movement. However, a
reconciliation from the Group's IFRS statement of consolidated financial
position to the Group's AUA is provided on page 88.
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 Open segment, and is stated after applicable II metrics as it represents an in-year movement.
and any restrictions in respect of contract boundaries and stated on a net of taxation and acquisition costs.
tax basis.
Operating companies' cash generation 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. combines cash flows relating to shareholders with cash flows relating to equivalent GAAP measure (IFRS statement of consolidated cash flows) as it
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 8, 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 86.
Operating companies' cash generation is a key performance indicator used by
management for planning, reporting and executive remuneration.
Adjusted operating profit Adjusted 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 adjusted 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 57.
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 notes 4
and 5 in the interim financial statements.
IFRS adjusted shareholders' equity IFRS adjusted shareholders' equity is calculated as IFRS Total equity Adjusted shareholders' equity indicates the value generated by the Group, Adjusted shareholders' equity reconciles to the IFRS balance sheet as follows:
attributable to owners of the parent plus the CSM, net of tax. including the value held in the CSM for IFRS 17 contracts.
FY22
£m
Total equity attributable to owners 3,211
of the parent
Add: CSM 2,594
Less: Tax on CSM (648)
Adjusted shareholders' equity 5,157
Shareholder Capital Coverage Ratio 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
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 review on page 9.
amounts relating to those ring-fenced with-profit funds and Group pension SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
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 Capital Coverage Ratio
Represents total Eligible Own Funds divided by the Solvency Capital
Requirements ('SCR'), adjusted to a shareholder view through the exclusion of
amounts relating to those ring-fenced with-profit funds and Group pension
schemes whose Own Funds exceed their SCR.
The unsupported with-profit funds and Group pension funds do not contribute to
the Group Solvency II surplus. However, the inclusion of related Own Funds and
SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
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.
Further details of the Shareholder Capital Coverage Ratio and its calculation
are included in the business review on page 9.
Additional information
Shareholder information
Annual General Meeting
Our Annual General Meeting ('AGM') was held on 4 May 2023 at 10.00am (BST).
The voting results for our 2023 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 (http://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 2023
2022 interim dividend
Ex-dividend date 28 September 2023
Record date 29 September 2023
Interim 2023 dividend payment date 23 October 2023
Forward-looking statements
The 2023 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, political, social, environmental and
business conditions;
· asset prices;
· market-related risks such as fluctuations in investment yields,
interest rates and exchange rates, the potential for a sustained low-interest
rate or high interest rate environment, and the performance of financial or
credit 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' regulations requirements on the Group's capital
maintenance requirements;
· the medium and long-term 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 for European and global
macroeconomic conditions of the Russia-Ukraine War and related or other
geopolitical conflict;
· the impact of changing inflationrates (including high inflation)
and/or 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,and implementing changes in IFRS 17
or any other regulatory, solvency and/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 2023 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 2023 Interim Report.
The Group undertakes no obligation to update any of the forward-looking
statements or data contained within the 2023 Interim Report or any other
forward-looking statements or data it may make or publish.
The 2023 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 2023
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 2023 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
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content, you can sign up for e-mail alerts, which will notify you when content
is added.
Go online
www.thephoenixgroup.com/site-services/email-alerts/ (https://www.thephoenixgroup.com/site-services/email-alerts/)
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