REG - Phoenix Grp Hldgs - 2014 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 1

Phoenix groupAnnouncement

29/10/2014 14:21

RNS Number : 6799P
Phoenix Group Holdings
21 August 2014
PHOENIX GROUP HOLDINGS
INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2014
21 AUGUST 2014
PHOENIX GROUP, THE UK'S LARGEST SPECIALIST CLOSED LIFE FUND CONSOLIDATOR, TODAY ANNOUNCES STRONG RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2014
Financial highlights
 332 million of cash generation1 in H1 2014 (HY13: 416 million). A further 390 million was received on completion of the divestment of Ignis to Standard Life Investments on 1 July 2014
 Group remains on track to achieve cash generation targets of 500 million - 550 million in 2014 and 2.8 billion between 2014 and 2019
 MCEV of 2.6 billion on a pro forma basis2 at 30 June 2014 (FY13: 2.4 billion), with 153 million of incremental MCEV enhancement achieved in H1 2014
 Gearing3 reduced from 44% at 31 December 2013 to 35% on a pro forma basis at 30 June 2014, meeting the Group's target of 40% gearing 18 months ahead of schedule. The future level of gearing will be consistent with the achievement and maintenance of an investment grade rating
 IGD surplus of 1.1 billion and IGD headroom of 0.4 billion on a pro forma basis at 30 June 2014 (FY13: 1.2 billion and 0.5 billion respectively)4
 PLHL ICA surplus of 0.7 billion and PLHL ICA headroom of 0.6 billion on a pro forma basis at 30 June 2014 (FY13: 1.2 billion and1.1billion respectively)4
 Group IFRS operating profit of 266 million in H1 2014 including 114 million from management actions (HY13: 186 million, including 24 million from management actions)
 Interim dividend of 26.7p per share5, in line with 2013 interim and final dividends
Divestment of Ignis and debt refinancing
 Completed divestment of Ignis Asset Management to Standard Life Investments on 1 July for 390 million in cash
 Comprehensive debt refinancing achieved:
- Divestment of Ignis supported a 250 million prepayment of bank debt
- Successful 300 million 7 year unsecured bond issue, at an attractive annual coupon, the net proceeds of which were used to prepay bank debt
- The refinancing of the Group's remaining senior bank debt and PIK notes into a single 900 million facility, in conjunction with a 206million associated debt prepayment made from internal resources
- Senior debt reduced from over 1.7 billion at the start of 2014 to 1.2 billion on a pro forma basis as at 30 June 2014
- Strengthens Phoenix's financial flexibility to pursue its growth strategy of acquiring closed life funds
Operational highlights
 Progressed Phoenix Life transformation with outsourcing partner HSBC to consolidate investment fund accounting, unit pricing and custody arrangements, with completion expected in 2015
 Continued the migration of in-force policies to the BaNCS administration platform, with the transfer of a further 65,000 policies following the expiry of our outsourcing contract with Capita Employee Benefits (formerly Capita Hartshead)
 Vesting and recently annuitised customers given options to take advantage of the extensive changes introduced by the 2014 Budget
 Continued initiatives to de-risk with-profit funds and accelerate distribution of estate to stakeholders
Clive Bannister, Group Chief Executive, commented:
"I am pleased to announce a strong set of results for the six months to 30 June 2014, including the completion of a number of transformational events for the group and a reduction in our level of senior debt from over 1.7 billion to 1.2 billion.
The underlying strength of the business model and the stable and predictable long-term cash generation has enabled us to declare a 2014 interim dividend of 26.7p per share, in line with the 2013 interim dividend. Given the run-off nature of the group's business, the Board believes it is prudent to maintain a stable, sustainable dividend whilst the Group builds its financial flexibility to execute its growth strategy and will keep the dividend under review.
The first half of 2014 has delivered many successes for the Group. The balance sheet has been transformed, our structure has been simplified and our reliance upon bank financing has been reduced. We have created a sound platform for Phoenix to consider potential acquisition opportunities, enabling us to grow the business and strengthen our existing position as the UK's largest specialist consolidator ofclosed life funds."
Notes
1. Operating companies' cash generation is a measure of cash and cash equivalents, remitted by the Group's operating subsidiaries to the holding companies and is available to cover dividends, bank interest and repayments and other items. The proceeds from the Ignis divestment are in addition to the 500 million - 550 million target for 2014. The Ignis divestment proceeds are subject to certain post-completion price adjustments.
2. All pro forma financial information at HY14 assumes that the proceeds from the divestment of Ignis and subsequent 250m debt prepayment, the 300m 5.75% 7 year senior unsecured bond issue and the 900m unsecured bank refinancing and associated 206m debt prepayment had taken place on 30 June 2014.
3. Gearing is calculated as gross shareholder debt as a percentage of gross MCEV.
4. Any references to IGD or PLHL ICA relate to the calculation for Phoenix Life Holdings Limited, ('PLHL'), the ultimate EEA insurance parent undertaking.
5. Key dates for the payment of the interim dividend of 26.7p per share are as follows:
Ex-dividend date on LSE 3 September 2014
Record date  5 September 2014
Dividend payment date  2 October 2014
Enquiries
Investors:
Sam Perowne, Head of Investor Relations, Phoenix Group
+44 (0) 20 3735 0021
Media:
Neil Bennett, Maitland
Peter Ogden, Maitland
+ 44 (0) 20 7379 5151
Further information
There will be a presentation for analysts and investors today at 9.30am (BST) at:
Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.
A link to a live webcast of the presentation, with the facility to raise questions, and a copy of the presentation will be available at www.thephoenixgroup.com. A replay of the presentation will also be available through the website.
Participants may also dial in as follows:
UK: 020 3059 8125
International: +44 20 3059 8125
Participant password: Phoenix
Phoenix Group will also be holding an Investor Day on 25 November 2014.
Forward looking statements
This announcement in relation to Phoenix Group Holdings and its subsidiaries (the 'Group') contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements 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', '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 and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and ultimate transition to the European Union's "Solvency II" Directive on the Group's capital maintenance requirements; the impact of inflation and deflation; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.
As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements 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 should be construed as a profit forecast or estimate.
Phoenix group holdings
INTERIM REPORT FOR THE HALF YEAR ENDED 30 JUNE 2014
Contents
GROUP CHIEF EXECUTIVE'S REPORT
02
Business review
07
Key performance indicators
08
Cash generation
10
Group MCEV
11
Group IFRS operating profit
13
Capital management
15
Principal risks and uncertainties facing the Group
18
IFRS condensed consolidated interim financial statements
19
Statement of Directors' responsibilities
20
Auditor's review report
21
Condensed consolidated interim financial statements and notes
22
Additional life company asset disclosures
56
MCEV supplementary information
63
Statement of Directors' responsibilities
64
Auditor's review report
65
MCEV interim financial statements and notes
66
Additional information
81
Shareholder information
82
Forward-looking statements
83
group chief executive'S report
INTRODUCTION
The first half of 2014 saw a number of transformational events for the Phoenix Group that together have simplified and strengthened our balance sheet, in line with our aim to achieve an investment grade rating in the future, and have enhanced the Group's ability to deliver on our ambition to lead the consolidation of the UK closed life fund sector.
First, in March we announced the divestment of Ignis Asset Management ('Ignis') to Standard Life Investments (Holdings) Limited ('Standard Life Investments') for 390 million, subject to regulatory approval. This transaction completed on 1 July 2014 and brings significant financial and strategic benefits to the Group, including a reduction in the level of gearing through a 250 million debt prepayment and a strategic alliance with Standard Life Investments. Second, on 7 July the Group issued a 300 million senior unsecured bond at an attractive rate of interest, thereby re-establishing a relationship with the debt capital markets. Finally, on 23 July we unified the two legacy debt silos (Pearl and Impala) into a single 900 million unsecured bank facility and repaid 206 million of bank debt from internal resources, simplifying the Group's debt structure, lowering our interest costs and reducing gearing further.
Together, these actions have reduced gearing to 35% on a Pro Forma Basis1, supporting our ambition to achieve an investment grade credit rating in due course and providing us with greater flexibility in financing future acquisitions.
This very positive activity for the Group has been completed against a backdrop of uncertainty for the broader insurance industry, with changes to retiree options as a result of the ending of compulsory annuities announced in the March Budget and in relation to the Financial Conduct Authority's ('FCA') planned thematic review of the fair treatment of long-standing customers in life insurance.
During the first half of 2014, our activities in relation to Solvency II have been focused primarily on the preparation of the Group's Internal Model Application, as well as on monitoring the progress of the development of the Solvency II regulations. The UK insurance industry is still awaiting details from regulatory authorities on the specific details in relation to the implementation of Solvency II. Provided that the regulations are in line with our expectations, it is Phoenix's view that the capital position of the Group will remain broadly aligned to the PLHL ICA surplus; however, this is subject to regulatory approvals and should not be seen as representing the views of the Prudential Regulation Authority.
The Board has declared an interim dividend for the first six months of 2014 of 26.7p per share which is scheduled to be paid on 2 October 2014 and is in line with the 2013 interim dividend. Given the long term run-off nature of the Group's business, the Board believes it is prudent to maintain a stable, sustainable dividend whilst the Group builds its financial flexibility to execute its growth strategy and will keep the dividend under review.
Performance highlights
The Group set itself targets at the time of our Annual Results announcement in March and I am pleased to be able to report significantprogress.
Against a full year cash generation target of 500 to 550 million, 332 million has been delivered in the first half of the year, primarily reflecting the release of free surplus generated in the life companies and the benefit of management actions, taking the Group over half way towards meeting the full year target. A further 390 million was received at the completion of the divestment of Ignis to Standard LifeInvestments on 1 July. Our total holding company cash balances were 1,081 million as at 30 June 2014, and this will reduce to 990million on a Pro Forma Basis.
Group MCEV was 2,328 million as at 30 June 2014, compared to 2,378 million as at the end of December 2013. The movement in thefirst half primarily reflects the achievement of a total of 153 million of management actions, offset by provisions for recent regulatory changes, economic variances and a 45 million increase in the value of our Tier 1 and Tier 2 Notes during the period, which are deducted from our MCEV at market value. On a Pro Forma Basis MCEV would increase by 274 million to 2,602 million as at 30 June 2014.
In March we announced a new cumulative target of 300 million incremental embedded value from management actions between 2014 and 2016. The Group generated 153 million of incremental MCEV during the first half of 2014 towards this target through a series of actions including enhancements from our new actuarial modelling system and a restructuring of the PGL Pension Scheme longevity arrangements. This outstanding start towards achieving our new target underlines the opportunity for the Group to continue to drive valuefrom the existing book of business.
1 Pro Forma Basis assumes that the proceeds of the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank facility refinancing, inclusive of the 206 million associated debt prepayment, had taken place on 30 June 2014.
Our gearing ratio reduced from 44% as at 31 December 2013 to 43% as at 30 June 2014. On a Pro Forma Basis the gearing ratio is reduced by a further 8 percentage points to 35%, thus achieving our original 40% target 18 months ahead of schedule. Going forward we intend to manage our gearing to a level consistent with our ambition to achieve and maintain an investment grade rating and we expect to start the process of formally engaging with the credit rating agencies during the second half of the year.
Our capital position remains robust with IGD surplus and headroom over our capital policy estimated at 1.3 billion and 0.6 billion respectively at 30 June 2014, compared with the IGD surplus of 1.2 billion and headroom of 0.5 billion at 31 December 2013. IGD surplus and headroom are reduced to 1.1 billion and 0.4 billion respectively on a Pro Forma Basis as at 30 June 2014, primarily as a result of the additional prepayment of debt, funded by internal resources, on drawdown of the new bank facility.
At 30 June 2014, our PLHL ICA surplus was estimated to be 1.0 billion, with headroom over our 150 million capital policy of 0.9 billion, compared to our PLHL ICA surplus and headroom at 31 December 2013 of 1.2 billion and 1.1 billion respectively. The reduction in the period primarily reflects the strengthening of assumptions related to longevity, credit and correlations. On a Pro Forma Basis PLHL ICA surplus and headroom both decreased by 0.3 billion, a combination of the impact arising from the divestment of Ignis and the additional prepayment of debt on the drawdown of the new bank facility.
Finally, the Group achieved IFRS operating profits of 266 million in the first half of 2014 including 114 million from management actions, compared to 186 million in the first half of 2013, which benefited from 24 million of management actions.
DIVESTMENT OF IGNIS AND Debt refinancing
The debt reduction and refinancing that the Group has achieved during the first half of 2014 consists of three separate transactions:
 The divestment of Ignis to Standard Life Investments for 390 million in cash, announced on 26 March. Following completion on 1 July, 250 million of the proceeds were used to prepay existing bank debt.
 The issue of a 300 million 7 year unsecured senior bond at an annual coupon of 5.75% from the Group's new financing subsidiary, PGH Capital Limited. The net proceeds from the bond were used to prepay existing bank debt on 7 July.
 The refinancing of the Group's remaining senior bank debt and PIK notes into a single 5 year 900 million unsecured bank facility at PGH Capital Limited on 23 July. The new facility was agreed with a core set of lending banks, which included some new lenders, and allows further simplification of the Group's corporate structure over time, including the possible further merger of Phoenix's two largest UK life companies (Phoenix Life Limited and Phoenix Life Assurance Limited). As part of the bank refinancing a further prepayment of 206 million of existing debt was made, financed by existing internal resources.
We have therefore replaced the Group's bank and senior debt, which previously consisted of two debt silos as well as associated PIK notes, with a senior bond and a new single bank facility. This refinancing is the culmination of a series of actions that the Group has undertaken to reduce its gearing over the past five years, with total shareholder borrowings, including our Tier 1 bonds, reducing from 3.5billion at the end of 2009 to 1.8 billion today.
The comprehensive debt refinancing strengthens Phoenix's position as the UK's largest specialist closed life fund consolidator and the Group will continue to progress its aim to achieve an investment grade credit rating, with formal engagement with the rating agencies expected to start during the second half of 2014. This ambition is supported by a Pro Forma Basis gearing level of 35% and, in future, wewill look to manage our gearing level in order to achieve and maintain an investment grade credit rating.
Phoenix Life review
Financial performance
Phoenix Life contributed IFRS operating profit from continuing operations of 256 million in the first half of 2014, compared to 178 million for the same period in 2013. Management actions included within operating profit totalled 114 million in the first half of 2014, whereas management actions totalled 24 million for the same period in 2013.
In relation to management actions that enhance MCEV, of particular note during the first half of 2014 was the completion of a transaction between Phoenix Life Limited and the Group to rebalance their exposure to longevity risk from the PGL Pension Scheme. This involved Phoenix Life Limited derisking certain with-profit funds (via the closure of a legacy longevity indemnity agreement) and entering into a longevity swap insurance (covering approximately 900 million of PGL Pension Scheme liabilities) which was simultaneously reinsured ona50% quota share basis. The overall impact from the transaction on the Group MCEV was a gain of 91 million.
Since 30 June 2014, Phoenix Life Limited has entered into a reinsurance agreement to transfer approximately 1.7 billion of in-payment liabilities from three with-profit funds to Guardian Assurance Limited ('Guardian'), effective 1 January 2014. It is expected that the reinsurance agreement will be replaced with a formal Part VII transfer of the annuities to Guardian in 2015, affecting around 60,000 policies. This transaction removes a significant element of longer dated risk from three separate with-profit funds in Phoenix Life Limited.
In addition to these important transactions Phoenix Life continued to make strong progress in other areas:
 Successfully streamlined the Group's actuarial modelling systems, using the new model to produce the 2014 half year results following decommissioning of the legacy models after a successful parallel run for the 2013 year end. The new model simplifies processes and enables consistent capital management across the business.
 Continued to make progress in consolidating its investment fund accounting, unit pricing and custody arrangements from multiple providers to Phoenix Life's single outsource partner, HSBC. Our investment fund accounting services have materially completed their migration to HSBC, streamlining our operations and increasing efficiency, and the wider programme is expected to conclude in 2015.
Policyholder actions
Our policyholders remain at the heart of Phoenix's business. As mentioned above, the changes to the compulsory annuitisation of pension pots announced in the March 2014 budget were unexpected. These changes introduced a number of new options for our customers both immediately following the announcement and from April 2015. In an effort to ensure as many customers as possible received the benefits of this new flexibility, both our existing pipeline of vesting customers and our recent annuitised customers were offered a widened set of options, including reinstating their policies to take advantage of the more extensive changes planned in 2015. We also continue to offer policyholders the opportunity to take up an enhanced annuity with a third party provider.
The speed of policy payouts has remained a key focus for us with improvements continuing to be made in our communications and processes. During the first half of the year, and despite the disruption of the budget changes, we continue to deliver our Pensions Transfers and Open Market Options payments made through the Origo Faster Transfers system in around 10 days on average. Complaint handling isalso a key area and whilst overall volumes of incoming servicing complaints are only 0.2% of the transactions that we carry out for our customers, we are still very focused on ensuring that our responses meet customers' needs and provide resolution to any issue they had. We continue to make improvements in both the volume of cases referred to the Financial Ombudsman Service and the number where they do not agree with our decision-making, with the FOS overturn rate continuing to show a strong performance at only 21% in the first half (FY 2013 - 21%).
In conjunction with our outsource partner, Diligenta, we continued the migration of in-force policies to the modern BaNCS administration platform, with the transfer of a further 65,000 policies following the expiry of our outsourcing contract with Capita Employee Benefits (formerly Capita Hartshead). We have now migrated a total of 3.24 million in-force policies to BaNCS.
Regulatory changes
The first half of 2014 saw a number of key regulatory changes to the UK life assurance sector. The financial impacts of several of these changes are still uncertain but the Group continues to take actions to prepare for the possible range of outcomes, including possible changes to policyholder decision-making.
The ending of compulsory annuitisation of pension pots, announced at the time of the Budget, is expected to have a significant impact across the UK life assurance industry. Phoenix only provides annuities for vesting policyholders and wrote a total of 284 million of annuitiesin the first half of 2014. 201 million of these annuities had guaranteed annuity rates ('GARs'), typically in the region of 11% per annum, and the Group continues to expect that the vast majority of the guaranteed business for higher value pension pots will continue to be written, given the attractive nature of the rates. However, we do expect an increase in cash being taken for lower value pension pots. Whilst it is still too early to draw firm conclusions, we have assumed that the future take-up of guaranteed annuities will decline by around 20% and this has had a small negative impact on our MCEV of 17 million.
With regard to non-GAR annuities again it is still too early to ascertain long term behaviour given that the impact of the Budget announcement will take some time to become clear. Volumes of non-GAR annuities written by the Group have fallen by around 50% inthefirst half of 2014, compared to the same period in 2013, as policyholders have deferred making decisions with regards to their pension pots following the budget. We have assumed for planning purposes that over the longer term take up of non-GAR annuities bypolicyholders will fall by around two thirds. The MCEV contribution from writing these annuities was 7 million in the first half of 2014 compared to 10 million for the comparable period in 2013.
The government announced a cap on charges for new auto-enrolment pensions of 75bps in March. Although auto-enrolment is not a market that Phoenix is actively engaging in, we have assessed the impact of applying the cap to our historic workplace schemes, should they wish to use them as qualifying schemes, and this has led to a reduction in the Group MCEV of 40 million being reflected in the 30June MCEV result.
Finally, the FCA has announced a thematic review of the fair treatment of long-standing customers in life insurance as part of their 2014/2015 business plan. The FCA work is still at an early stage but they have confirmed that the scope of the review will cover firms' strategies with regard to their legacy product portfolios, the performance of legacy products, allocation of expenses between closed andopen books of business, customer communication and the level of exit charges.
Given our focus on closed books we can demonstrate a clear strategy for legacy products and given that Phoenix does not write new products (other than vesting annuities) we do not believe that any review of cross-subsidisation between open and closed books would berelevant to us. Furthermore, we believe that the ongoing efforts of the Group to improve performance and service to our policyholders are a clear demonstration of good practice within the closed life fund market. We look forward to actively engaging with the FCA in their review in the coming months and will update the market in due course.
Ignis Asset Management review
The divestment of Ignis completed on 1 July. In addition to the cash consideration of 390 million (subject to adjustment), Ignis also generated a further 32 million of cash in the first half of the year.
Ignis' IFRS operating profits declined to 17 million over the period, compared to 19 million during the first half of 2013. This is primarily a result of life company asset run-off, higher staff incentive costs and lower performance fees, partially offset by continued growth in Ignis' third party business.
Our strategic partnership with Standard Life Investments offers both policyholders and shareholders the opportunity to benefit from the strength and depth of Standard Life Investments' expertise in managing life assurance assets. In addition, Phoenix has agreed a Synergy Sharing Agreement, whereby the Group can continue to benefit from asset management synergies that are generated from any future assets that we place with Standard Life Investments.
I would like to take this opportunity to thank all of the Ignis employees for their hard work during their time with the Group and I wish them well with their future careers.
Outlook
The first half of 2014 has delivered many successes for the Group. The balance sheet has been transformed through the sale of Ignis, issuance of a senior bond and the achievement of a single silo debt facility, all of which completed during July. Our structure has been simplified and our reliance upon bank financing has been reduced. The re-establishment of a relationship with debt capital markets is expected to provide a valuable source of alternative funding for future strategic activity. Together, these transactions, alongside the strategicalliance with Standard Life Investments, have created a solid platform for Phoenix to consider potential acquisition opportunities, enabling us to grow the business and strengthen our existing position as the UK's largest specialist consolidator of closed life funds.
The 2014 Budget announcement on annuities and the FCA's confirmation of a thematic review of the fair treatment of long-standing customers in life insurance as part of its 2014/15 business plan highlight the challenges of regulatory change for our industry. I strongly believe that the impact of the changes to annuities will alter the landscape of the UK life assurance industry, thereby providing Phoenix witha number of opportunities as open life companies are forced to re-appraise their business models and strategies for their legacy policies. The actions we have completed during the first half of 2014 have positioned the Group to take advantage of these industrychanges. That said, it is accepted that these announcements may result in a period of hiatus in acquisition activity across the sectorwhilst the new regulations are implemented and we await the outcome and subsequent recommendations of the FCA review.
Irrespective of the wider ongoing industry challenges, our focus will remain on the continued delivery of strong organic performance across all of our key financial metrics and targets. We have consistently met or exceeded all of our public financial targets and this is a track record that we are committed to continuing.
I would like to thank my colleagues for their hard work during this exceptionally busy period for the Group, and look forward to capitalising on our renewed strength, delivering value for all stakeholders during the remainder of the year.
CLIVE BANNISTER
Group Chief Executive
20 AUGUST 2014
BUSINESS REVIEW
KEY PERFORMANCE INDICATORS
08
CASH GENERATION
10
GROUP MCEV
11
GROUP IFRS OPERATING PROFIT
13
CAPITAL MANAGEMENT
15
PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP
18
Business review
Key performance indicators
OPERATING COMPANIES' CASH GENERATION
332m
(HY13: 416 MILLION)
With cash generation of 332 million in the period, the Group is on track to meet its full year cash generation target1 for 2014 of 500 million to 550 million, excluding Ignis divestment proceeds. Management actions have generatedcash flows of 149 million in the period.
The cumulative cash flow target1 for 2014 to 2019 is2.8billion, including Ignis divestment proceeds.
The Phoenix Life free surplus decreased to 379 million at30June 2014 (YE13: 529 million), reflecting cash distributions to the holding companies of 211million and theimpact of strengthening longevity, credit and correlations assumptions, partly offset by capital generation in the period
GROUP MCEV
ACTUAL:
2,328m
PRO FORMA BASIS2:
2,602m
(31 DECEMBER 2013: 2,378 MILLION)
Group MCEV decreased by 50 million to 2,328 million at30June 2014, reflecting the adverse impacts of recent external regulatory changes, increases in the market value ofthe Group's Tier 1 and Tier 2 debt and a reduction in futuretax benefits following refinancing activities and the divestment of Ignis Asset Management ('Ignis'). This has been partly offset by 153 million of benefits from value enhancing management actions.
MCEV as at 30 June 2014 increases to 2,602 million on a pro forma basis to reflect the divestment of Ignis and the Group's debt refinancing.
The Group's incremental MCEV target1 is 300 million between 2014 and 2016, of which 153 million has now been delivered.
GEARING RATIO
ACTUAL:
43%
PRO FORMA BASIS2:
35%
(31 DECEMBER 2013: 44%)
Gearing reduced to 43% at 30 June 2014, reflecting debt repayments of 85 million made in the period. Gearing reduces to 35% at 30 June 2014 on a pro forma basis reflecting the divestment of Ignis, the related 250 million debt prepayment and the 206 million debt prepayment associated with the Group's bank and senior debt refinancing, thus meeting our original 40% target 18 months ahead ofschedule.
GROUP IFRS OPERATING PROFIT3
266m
(HY13: 186 MILLION)
Group IFRS operating profit increased by 80 million to 266million, principally reflecting the greater benefit derived from actuarial modelling enhancements and balance sheet reviews of 114 million compared to the prior period (HY13:24 million).
IGD SURPLUS (ESTIMATED)
ACTUAL:
1.3bn
PRO FORMA BASIS2:
1.1bn
(31 DECEMBER 2013: 1.2 BILLION)
The estimated IGD surplus has increased by 0.1 billion to 1.3 billion. The key drivers of the increase in the IGD surplus include capital generation items of 0.2 billion offset by financing and debt repayments of 0.1 billion. Headroom over the Group's capital policy has also increased as a resultof these factors to 0.6 billion (31December 2013: 0.5billion).
The IGD surplus on a pro forma basis is 0.2 billion lower, driven by the 206 million debt prepayment associated with the refinancing of the Group's bank and senior debt.
PLHL ICA SURPLUS (ESTIMATED)
ACTUAL:
1.0bn
PRO FORMA BASIS2:
0.7bn
(31 DECEMBER 2013: 1.2 BILLION)
The reduction in the estimated PLHL ICA surplus of0.2billion in the period primarily reflects the strengthening of theassumptions related to longevity, creditand correlations. 
On a pro forma basis the PLHL ICA surplus decreased by 0.3 billion to 0.7 billion, reflecting the impact arising from the divestment of Ignis and the 206 million prepayment ofdebt associated with the refinancing of the Group's bank and senior debt.
The Group aims to ensure that PLHL maintains an ICA surplus of at least 150 million.
INTERIM DIVIDEND PER SHARE
26.7p per share
(HY13: 26.7 PENCE PER SHARE)
Interim dividend per share of 26.7p.
The dividend is in line with the 2013 interim and finaldividends.
1 This target has been set on the assumption that Solvency II regulations operate as expected.
2 The pro forma basis assumes that the proceeds from the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014.
3 Group operating profit is stated before adjusting items and includes discontinued operations.
Cash generation
Holding companies' cash flows
The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Although investment returns are less predictable, some of this risk is borne by policyholders.
The following analysis of cash flows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of these cash receipts:
Holding companies' cash flows
Half year ended 30 June 2014
Pro forma1
m
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Cash and cash equivalents at start of period
995
995
1,066
Cash receipts from Phoenix Life
211
211
411
Cash receipts from Ignis 
32
32
5
Other cash receipts
89
89
-
Operating companies' cash generation2
332
332
416
Proceeds from divestment of Ignis 
390
-
-
Net proceeds of the equity raise3
-
-
211
Cash receipts
722
332
627
Uses of cash:



Operating expenses
(13)
(13)
(21)
Pension scheme contributions
(13)
(13)
(16)
Debt interest
(59)
(59)
(88)
Total recurring cash outflows
(85)
(85)
(125)
Non-recurring cash outflows
(41)
(16)
(7)
Uses of cash before debt repayments and shareholder dividend
(126)
(101)
(132)
Debt repayments
(541)
(85)
(535)
Shareholder dividend
(60)
(60)
(60)
Cashand cash equivalents at end of period4
990
1,081
966
1 The pro forma basis assumes that the proceeds from the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014. The 300 million proceeds from the senior unsecured bond issue were used to reduce the debt by 296 million and pay costs of 4 million resulting in a cash neutral position in the pro forma analysis of cash flows.
2 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of 4 million (HY13: 15 million).
3 Proceeds of the equity raise in 2013 of 232 million net of associated fees and commission, and after the deduction of 21 million of fees associated with the re-terming of the Impalaloanfacility.
4 Closing balance at 30 June 2014 includes required prudential cash buffer of 150 million (30 June 2013: 150 million).
Cash receipts
Cash remitted by the operating companies was 332 million (HY13: 416 million), driven largely by the opening free surplus within the lifecompanies. Other cash receipts comprised 68 million from the buy-out of the Pension Indemnity from the with-profit funds and 21million from the sale of BA(GI) Limited.
On 1 July 2014 the Group completed the divestment of Ignis to Standard Life Investments (Holdings) Limited ('Standard Life Investments') and received gross proceeds of 390 million.
Phoenix Life free surplus
The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life:
Phoenix Life free surplus movement
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Opening free surplus5 
529
514
Cash distributed to holding companies
(211)
(411)
IFRS operating profit 
256
178
IFRS economic variances and non-recurring items
3
(56)
IFRS taxation
(52)
(18)
Movements in capital requirements and policy
3
150
Valuation differences and other6
(149)
49
Closing free surplus 
379
406
5 The life companies' free surplus is the excess of the net worth over the required capital reflected in the MCEV and represents capital in excess of what is required under the life companies' capital policies.
6 Includes differences between IFRS valuation of assets and liabilities and valuation for capital purposes.
The Phoenix Life free surplus of 379 million has decreased by 150 million in the period reflecting cash distributed to the holding companies of 211 million and the impact of the strengthening of assumptions in respect of longevity, credit and correlations, partly offsetby capital generation in the period and the positive impact of the release of capital requirements from the run-off of the life funds.
Uses of cash
Recurring cash outflows
Operating expenses were lower than 2013 half year results as a result of lower corporate office costs, primarily staff costs. Pension scheme contributions decreased in line with the latest triennial funding valuation. This decrease was partly offset by a one-off 5 million payment to the PGL Pension Scheme.
Debt interest decreased to 59 million (HY13: 88 million), mainly reflecting lower costs associated with the Group's interest rate swap arrangements which were closed out during 2013 and lower debt principal balances following the debt repayments over the period.
Non-recurring cash outflows
Non-recurring cash outflows of 16 million (HY13: 7 million) reflect Group restructuring and corporate related projects. Also included are payments to the Employee Benefit Trust of 7 million.
On a pro forma basis, non-recurring cash outflows increase by 25 million to 41 million as a result of bank and professional fees associated with the refinancing of the Group's bank debt and professional fees and other costs associated with the divestment of Ignis.
Debt repayments and shareholder dividend
Debt repayments in the first half of 2014 include a 30 million targeted prepayment and a scheduled repayment of 30 million in respect ofthe Group's Impala loan facility, together with a scheduled repayment of 25 million7 in respect of the Pearl loan facility.
On a pro forma basis debt repayments increase by 456 million to 541 million, reflecting the 250 million debt prepayment following the divestment of Ignis and the 206 million debt prepayment associated with the 900 million debt facility refinancing.
Shareholder dividends paid in the first half of 2014 were 60 million.
7 This includes 2 million paid to Phoenix Life Assurance Limited, a subsidiary undertaking. Phoenix Life Assurance Limited was a lender under the Pearl facility.
Group MCEV
Group MCEV earnings8
The Group generated MCEV operating earnings after tax of 162 million for the period, an increase of 17 million on the comparative period. Following the completion of the divestment of Ignis on 1 July 2014, its results have been classified as arising from discontinued operations in the MCEV financial statements for the period.
Group MCEV earnings
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Life MCEV operating earnings9
181
165
Management services operating profit
16
18
Ignis Asset Management operating profit
17
19
Group costs
(10)
(13)
Group MCEV operating earnings before tax
204
189
Tax charge on operating earnings
(42)
(44)
Group MCEV operating earnings after tax
162
145
Economic variances on life business
(28)
(30)
Economic variances on non-life business
(37)
(43)
Other non-operating variances on life business
(132)
(3)
Non-recurring items on non-life business
59
(38)
Finance costs attributable to owners
(62)
(84)
Tax on non-operating earnings
20
9
Group MCEV loss after tax
(18)
(44)
Analysed between:


Group MCEV loss after tax from continuing operations
-
(23)
Group MCEV loss after tax from discontinued operations
(18)
(21)
Group MCEV loss after tax
(18)
(44)
8 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information as MCEV) is set out in note 1 to the supplementary information. The asset management and management services businesses are included in the Group MCEV at the value of their IFRS net assets. The Group MCEV does not include the future earnings from their businesses.
9 Life MCEV operating earnings are derived on an after tax basis. For presentational purposes, Life MCEV operating earnings before tax have been calculated by grossing up the after tax Life MCEV operating earnings. Life MCEV operating earnings before tax of 181 million (HY13: 165 million) are therefore calculated as 142 million operating earnings (HY13: 127million) grossed up for tax at 21.5% (HY13: 23.25%)
Other than vesting annuities and increments to existing policies, the Group's life division is closed to new business. The principal underlying components of the life MCEV operating earnings are therefore the expected existing business contribution together with non-economic experience variances and assumption changes.
Life MCEV operating earnings after tax
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
New business value
7
10
Expected existing business contribution
72
62
Non-economic experience variances and assumption changes:


Experience variances
36
26
Assumption changes
(17)
20
Other operating variances 
44
9
Total non-economic experience variances and assumption changes
63
55
Life MCEV operating earnings after tax
142
127
New business value generated from vesting annuities during the period was 7 million after tax. New business value represents the valueof vesting pension policies not reflected in the opening MCEV. These arise from pension policies which have no attaching annuity guarantees. The decrease compared to the prior period reflects lower premium volumes on vestings without guaranteed annuity rates.
The Group uses long-term investment returns in calculating the expected existing business contribution. The expected contribution of 72million after tax is 10 million higher than in 2013, primarily due to an increase in the long-term risk-free rate used to calculate operating earnings. 
The life division's non-economic variances and assumption changes increased MCEV by 63million after tax in the period (HY13: 55million) and primarily relate to one-off positive impacts of 72 million from modelling enhancements reflecting the implementation ofthe Group's new actuarial system and refinements to the modelling of credit default risk, together with the impact of balance sheet reviews conducted in the period. This has partly been offset by a negative impact of 17 million relating to the impact of the assumed reduction in take-up of guaranteed annuities following the pension reforms announced in the March budget. Net other itemshave increasedMCEV by 8 million.
Management services and Ignis operating profit
Commentary on the management services and Ignis operating profit is provided in the Group IFRS operating profitsection.
Group costs
The Group costs of 10million (HY13: 13 million) include costs relating to Group functions and project spend of 10 million before tax (HY13: 9 million). The balance of the charge in the prior period relates to charges on the Pearl Group Staff Pension Scheme, which were minimal in the current period.
Economic variances
Negative economic variances on life business of 28 million before tax primarily relate to the negative impacts of the difference between actual short-term returns and the long-term investment return assumptions used to determine operating earnings and increases in the market value of the Tier 2 debt, partly offset by positive property and equity returns in the period and the impact of falling yields.
Negative economic variances on non-life business of 37 million before tax largely relate to an increase in the market value of the Tier 1 Notes, which decreased MCEV earnings by 40 million (HY13: 58 million) partly offset by the reduction in the fair value of the Phoenix Group Holdings warrants of 4 million.
Other non-operating variances on life business
Other non-operating variances on life business decreased Group MCEV by 104 million on a net of tax basis. The decrease primarily relatesto a loss of 40 million in relation to an anticipated reduction in future profits arising from external regulatory changes to the cap onworkplace pension charges, 25million relating to anticipated VAT costs on future management investment expenses following the divestment of Ignis, a 14 million loss arising from the reinsurance agreement to transfer annuity in-payment liabilities held within the withprofit funds to Guardian Assurance Limited and a 36 million reduction in the value of in-force business to reflect the impact of debt repayments, refinancing and other corporate activity on expected tax attributes available to the Group to relieve tax on emerging surpluses. This has partly been offset by a gain of 23 million arising from the restructure of Phoenix Life Limited's exposure to longevity risk from the PGL Pension Scheme. Net other items decreased MCEV by 12 million.
Non-recurring items on non-life business
Overall non-recurring items on non-life business increased embedded value by 59 million before tax. Non-recurring items include 68million income received by Pearl Group Holdings (No. 1) Limited ('PGH1') from the with-profit funds in relation to the close-out of the PGL Pension Scheme longevity indemnity agreement. Partly offsetting this income are 16 million of Group project and transformation costs, with net other one-off items having a positive impact of 7 million. Non-recurring items in the comparative period included arrangement and structuring fees of 21 million associated with the re-terming of the Impala loan facility and regulatory change, systemstransformation costs and other one-off items of 17 million.
Finance costs attributable to owners
Finance costs attributable to owners comprise:

Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Debt finance costs1
36
58
Other (including Tier 1 coupon)
26
26

62
84
1 Finance costs in respect of bank debt (and associated swap interest).
Debt finance costs have decreased by 22 million, mainly reflecting the closure of the Group's interest rate swap arrangements in the second half of 2013 which were responsible for a net finance charge in the comparative period.
Group MCEV
The Group MCEV decreased by 50 million over the period to 2,328 million at 30 June 2014 as shown below:
Movement in Group MCEV
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Group MCEV at 1 January
2,378
2,122
Group MCEV loss after tax 
(18)
(44)
Other comprehensive income
32
(2)
Capital and dividend flows
(64)
171
Group MCEV at 30 June 
2,328
2,247
An actuarial gain of 42 million (net of tax) (HY13: 10 million) was recognised in other comprehensive income in respect of the Pearl Group Staff Pension Scheme, partly offset by pension contributions (net of tax) of 10 million (HY13: 12 million) in respect of the PGL Pension Scheme. Capital and dividend flows in the period primarily comprise external dividend payments of 60 million, and movements in the ownshares held balance. The comparative period comprised ordinary share capital issued of 233 million (net of associated fees and commissions) less external dividend payments of 60 million and movements in own shares held.
Assuming that the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014, Group MCEV would increase to 2,602 million.
Group IFRS operating profit
The Group has generated an IFRS operating profit of 266 million for the period (HY13: 186 million).
Following the completion of the divestment of Ignis on 1 July 2014, its results have been classified as arising from discontinued operations in the IFRS financial statements for the period.
Group IFRS operating profit
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
IFRS operating profit


Phoenix Life 
256
178
Ignis Asset Management - discontinued operations
17
19
Group costs
(7)
(11)
Operating profit before adjusting items
266
186
Investment return variances and economic assumption changes on long-term business
59
(13)
Variance on owners' funds
-
(20)
Amortisation of acquired in-force business and other intangibles
(55)
(60)
Non-recurring items
9
(40)
Profit before finance costs attributable to owners
279
53
Finance costs attributable to owners
(48)
(65)
Profit/(loss) before finance costs attributable to owners:


From continuing operations
258
16
From discontinued operations
(27)
(28)

231
(12)
Tax charge attributable to owners from continuing operations
(49)
(2)
Tax credit attributable to owners from discontinued operations
9
6
Profit/(loss) for the period attributable to owners
191
(8)
Phoenix Life
Operating profit for Phoenix Life is based on expected investment returns on financial investments backing owners' and policyholder fundsover the reporting period, with consistent allowance for the corresponding expected movements in liabilities. The principal assumptions underlying the calculation of the longer-term investment return are set out in note 5 to the IFRS condensed consolidated interim financial statements.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit.
Phoenix Life operating profit
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
With-profit
36
36
With-profit where internal capital support provided 
(6)
12
Non-profit and unit-linked
205
105
Long-term return on owners' funds
5
7
Management services
16
18
Phoenix Life operating profit before tax
256
178
The with-profit operating profit of 36 million represents the shareholders' one-ninth share of the policyholder bonuses and is in line with thecomparative period (HY13: 36 million).
The operating profit for with-profit funds where internal capital support has been provided has decreased by 18 million, resulting in an operating loss for the period of 6 million (HY13: profit 12 million). The decrease compared to the prior period reflects the one-off adverse impact of modelling enhancements in the period of 24 million partly offset by the impact of changes to persistency assumptions in light ofthe pensions reforms announced in the March budget which have reduced the expected costs of policyholder guarantees.
The operating profit for non-profit and unit-linked funds was 205 million (HY13: 105 million). The increase compared to the prior period reflects higher one-off positive impacts of 138 million (HY13: 24 million) from modelling enhancements reflecting the implementation ofthe Group's new actuarial modelling system and refinements to the modelling of credit default risk, together with the impact of balance sheet reviews conducted in the period.
Of the 205 million of non-profit and unit-linked IFRS operating profits, 14 million was generated on annuity new business (HY13: 20 million). Of this, 4 million related to policies without guaranteed annuity rates.
The long-term return on owners' funds of 5 million reflects the asset mix of owners' funds, primarily cash-based assets and fixed interest securities. The investment policy for managing these funds remains prudent.
The operating profit for the management services companies comprises income from the life companies in accordance with the respective management services agreements less fees related to the outsourcing of services and other operating costs. The current period operating profit of 16 million has decreased compared to the prior period (HY13: 18 million), reflecting the impacts of life company run-off and the transfer of annuity policies to Guardian Assurance Limited in 2013, partly offset by lower staff costs.
Ignis asset management
The operating profit of the asset management business of 17 million was lower than the comparative period (HY13: 19 million). Operating profit has been impacted by lower life company revenue from asset run-off, higher staff incentive costs and lower performance fees, partly offset by continued growth in third party business. Ignis has been classified as a discontinued operation in the period.
Group costs
Group costs were 7 million in the period (HY13: 11 million). The decrease in Group costs compared to the prior period relates to lower pension scheme costs, reflecting a lower opening IAS 19 pension scheme liability for the Pearl Staff Pension Scheme and a higher opening IAS 19 pension scheme asset for the PGL Pension Scheme. Group costs in the period have also benefited from reduced Group recharges reflecting lower staff costs.
Adjusting items
Overall, the life companies had positive investment return variances and economic assumption changes of 59 million in the period, which includes the minority share of the result of the consolidated UKCPT property investment structure of 37 million. The remaining positive variance reflects the impact of positive property returns and changes in inflation assumptions, partly offset by losses on equity hedging positions held by certain life funds on an economic basis.
The negative variance on owners' funds of 20 million in the prior period primarily related to fair value losses on swap and equity hedging positions held within the shareholder funds. Interest rate swaps held by the holding companies and the life company shareholder funds wereclosed out in the second half of 2013 and the remaining instruments held have given rise to minor offsetting movements in the period.
Acquired in-force business and other intangibles of 2.7 billion were recognised on the acquisition of the operating companies in 2009. The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the period totalled 48 million (HY13: 51 million). Amortisation of other intangible assets totalled 7 million in the period (HY13: 9 million).
Non-recurring items includes income received by PGH1 of 68 million in relation to the close-out of the PGL Pension Scheme longevity indemnity agreement with the with-profit funds, partly offset by costs of 14 million arising from external regulatory changes with respect tothe cap on workplace pension charges, 27 million of capitalised costs in respect of VAT on future investment management expenses arising as a result of the divestment of Ignis, corporate project costs of 11 million (HY13: 3 million) and 7 million of costs associated with net other items. In 2013 non-recurring items included arrangement and structuring fees of 21 million associated with the re-terming of the Impala loan facility.
Finance costs attributable to owners
Finance costs attributable to owners comprise:

Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Debt finance costs1
36
58
Other finance costs
12
7
Finance costs attributable to owners
48
65
1 Finance costs in respect of bank debt (and associated swap interest).
Debt finance costs have decreased by 17 million, mainly reflecting the closure of the Group's interest rate swap arrangements in the second half of 2013 which were responsible for a net finance charge in the comparative period.
Tax credit attributable to owners
The Company is exempt from tax in the Cayman Islands on any profits, income, gains or appreciations for a period of 30 years from 11May2010.
With effect from the acquisition of the operating subsidiaries in the third quarter of 2009, the Company has been managed and controlled from Jersey, where its permanent office premises are located. As a Jersey resident holding company, the Company is subject to a 0% tax rate on its income. Consequently tax charged in these accounts primarily represents UK tax on profits earned in the UK, where the principal operating companies, excluding Opal Re, have their centre of operations.
The Group tax charge for the period attributable to owners is 40 million (49 million from continuing operations and 9 million tax credit from discontinued operations), based on a profit (after policyholder tax) of 231 million (258 million from continuing operations and 27 lossfrom discontinued operations). The actual charge is lower than the expected charge (based on the UK corporation tax rate of 21.5%) of50 million, primarily due to certain profit being either non-taxable or taxable at rates other than the standard rate (see note 6 to the IFRS condensed consolidated interim financial statements for analysis with respect to continuing operations).
Capital management
The Group has continued to focus on capital and gearing during the period. Our capital position remains robust, the IGD surplus is 1.3 billion and the PLHL ICA surplus is 1.0 billion at 30 June 2014. The gearing ratio as at 30 June 2014 is 43%.
Regulatory capital requirements
IGD surplus (estimated)
Each UK life company must retain sufficient capital at all times to meet the regulatory capital requirements mandated by the PRA. Thesemeasures are aggregated under the European Union Insurance Groups' Directive ('IGD') to calculate regulatory capital adequacy atagroup level.
The Group's IGD assessment is made at the level of the highest EEA level insurance group holding company, which is Phoenix Life Holdings Limited ('PLHL'), a subsidiary of Phoenix Group Holdings.
The estimated IGD surplus at 30 June 2014 is 1.3billion. The components of the estimated IGD calculation are shown below:

30 June 2014
Pro forma2
bn
30 June
2014
bn
31 December
2013
bn
Group capital resources ('GCR')
5.1
5.3
5.4
Group capital resource requirement ('GCRR')
(4.0)
(4.0)
(4.2)
IGD surplus (estimated)
1.1
1.3
1.2
2 The pro forma basis assumes that the proceeds from the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014.
The key drivers of the increase in the IGD surplus include capital generation items of 0.2 billion including capital benefits in relation to theclose-out of the PGL Pension Scheme longevity indemnity agreement, offset by debt financing and repayments of 0.1 billion.
The Group's capital policy, which is agreed with the PRA, is to maintain GCR at the PLHL level of:
 105% of the with-profit insurance component ('WPICC'), being an additional capital requirement in respect of with-profit funds; plus
 145% of the GCRR less the WPICC.
The Group's headroom at 30 June 2014 was 0.6billion (31 December 2013: 0.5 billion).
The Group's IGD surplus on a pro forma basis is 0.2 billion lower and this reduction is primarily driven by the 206 million debt prepayment following the 900 million debt facility refinancing. The divestment of Ignis and the subsequent 250 million prepayment is broadly neutral for IGD.
PLHL ICA surplus (estimated)
In accordance with PRA requirements the Group undertakes an Individual Capital Assessment ('ICA') at the level of the highest EEA insurance group holding company, which is PLHL. This involves an assessment, on an economic basis, of the capital resources and requirements arising from the obligations and risks which exist outside the life companies.
As agreed with the PRA, the Group aims to ensure that PLHL maintains an ICA surplus of at least 150 million. PLHL's ICA position at 30June 2014 is set outbelow:

30 June 2014
Pro forma1
bn
30 June
2014
bn
31 December
2013
bn
Capital resources2
1.0
1.4
1.5
Capital resource requirements3
(0.3)
(0.4)
(0.3)
PLHL ICA surplus (estimated)
0.7
1.0
1.2
1 The pro forma basis assumes that the proceeds from the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014.
2 Capital resources includes the surplus over capital policy in the life companies, a prudent assessment of the present value of future profits of Ignis Asset Management and the net assets of the holding companies less pension scheme obligations calculated on an economic basis.
3 Capital requirements relate to the risks arising outside of the life companies including those in relation to the Group's staff pension schemes, offset by Group diversification benefits.
Headroom over the Group's 150 million capital policy was 0.9 billion as at 30 June 2014 (31 December 2013: 1.1 billion).
The reduction in the PLHL ICA surplus and headroom of 0.2 billion primarily reflects the strengthening of the assumptions related tolongevity, credit and correlations. On a pro forma basis the PLHL ICA surplus and headroom both decreased by 0.3 billion, a combinationofthe impact arising from the divestment of Ignis and the 206 million prepayment of debt following the 900 million debtfacility refinancing.
Sensitivity analysis
As part of the Group's internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided below:

Estimated
IGD surplus
30 June 2014
bn
Estimated
PLHL ICA
surplus
30 June 2014
bn
Sensitivity analysis


Base: 30 June 2014 
1.3
1.0
Following a 20% fall in equity markets 
1.3
0.9
Following a 15% fall in property values
1.3
0.9
Following a 75 bps increase in nominal yields4
1.3
1.1
Following a 75 bps decrease in nominal yields5
1.4
0.9
Following credit spread widening6
1.4
0.8
4 75 bps parallel increase in nominal yields and a 75 bps increase in inflation.
5 75 bps parallel decrease in nominal yields and a 75 bps decrease in inflation.
6 11-15 year term: AAA 44bps, AA 93bps, A 111bps, BBB 187bps.
The relative insensitivity of the Group's IGD surplus reflects the nature of Pillar 1 rules for with-profit funds, which stipulate that the surplus estate is treated as policyholder liabilities. The sensitivities reflect the impact of market movements not only on the Group's life companies, but also on its staff pension schemes.
Shareholder debt
In managing capital the Group seeks to optimise the level of debt in its statement of consolidated financial position. The Group's closed book business model allows it to operate with higher leverage than life companies that are still writing new business, as it does not need tofund upfront capital requirements and new business acquisition expenses.
The Group monitors the level of debt in its statement of consolidated financial position by reference to the gearing ratio calculated as grossshareholder debt7 as a percentage of gross MCEV8. The gearing ratio as at 30 June 2014 under the Group's methodology is 43% (31December 2013: 44%). Assuming that the proceeds from the divestment of Ignis and subsequent 250 million debt prepayment, the 300 million 5.75% 7 year senior unsecured bond issue and the 900 million unsecured bank refinancing and associated 206 million debt prepayment had taken place on 30 June 2014, the Group's gearing level reduces to 35%, thus meeting our original 40% target 18 months ahead of schedule.
Gross shareholder debt and shareholder debt (including hybrid debt) included in MCEV as at 30 June 2014 are shown below:

30 June 2014
Pro forma1
m
30 June
2014
m
31 December
2013
m
Shareholder debt (including hybrid debt)



Bank debt 



Pearl facility
-
304
327
Pearl loan notes 
-
77
76
Impala facility
-
1,122
1,182
Royal London PIK notes and facility 
-
124
121
PGH Capital facility
886
-
-
PGH Capital senior bond
296
-
-
PLL subordinated debt 
155
155
151
Tier 1 bonds at 50% of IFRS carrying value (see note 10 to the IFRS condensed consolidated interim financial statements)
199
199
204
Gross shareholder debt
1,536
1,981
2,061
Adjustments to include the following items at market value:



PLL subordinated debt
59
59
54
PGH Capital senior bond
4
-
-
Tier 1 bonds (100% of market value)
190
190
146
Adjustment to include the following item at face value:



 PGH Capital facility
14
-
-
Shareholder debt (including hybrid debt) included in MCEV
1,803
2,230
2,261
Gross shareholder debt has fallen by 80 million in the period, reflecting a 30 million targeted repayment and a 30 million scheduled repayment made during the period in respect of the Impala facility and a scheduled repayment of 25 million in respect of the Pearl loan facilitiy9.
The Group's shareholder debt decreases on a pro forma basis by 445 million to 1,536 million. This reflects the 250 million prepayment following the divestment of Ignis and the 206 million prepayment relating to the 900 million debt facility refinancing. The PGH Capital facility and PGH Capital Senior bond are stated at their IFRS value and are therefore recognised net of fees and commissions associated with the issuance of the instruments. On an MCEV basis, the PGH Capital facility will be recognised at its face value and the PGH Capital senior bond at its listed market value.
Further detail in respect of shareholder debt is included in note 13 to the IFRS condensed consolidated interim financial statements.
7 Gross shareholder debt is defined as the sum of the IFRS carrying value of the shareholder debt and 50% of the IFRS carrying value of the Tier 1 bonds given the hybrid nature of thatinstrument.
8 Gross MCEV is defined as the sum of Group MCEV and the value of the shareholder and hybrid debt as included in the MCEV.
9 This includes 2 million paid to Phoenix Life Assurance Limited ('PLAL') a subsidiary undertaking. PLAL was a lender under the Pearl facility.
The Group operates a Risk Management Framework ('RMF') which seeks to establish a coherent and proactive set of arrangements and processes to support the effective management of risk throughout the Group. The Board seeks to ensure that the Group identifies and manages all risks, either to create additional value for its stakeholders or to mitigate any potentially adverse effects. A summary of the principalrisks and uncertainties facing the Group is found below. The outputs of the RMF provide assurance that risks are being appropriately identified and managed, and that an independent assessment of management's approach to risk management is being performed. 
During the year, the Group has continued to strengthen and embed the components of the RMF to ensure that they are aligned with evolving regulatory requirements including Solvency II.
This has included, for example, an increasing focus onindependent reviewsby the Group Risk function of the risk profile of the Group. 
Principal risks and uncertainties facing the Group
Risk
Impact
Mitigation
The Group is exposed to market risk and in times of severe market turbulence could suffer a loss of value. 

The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group's embedded value, financial condition and prospects.

The Group undertakes regular monitoring activities in relation to market risk exposure, including the monitoring of asset mixes, cash flow forecasting and stress and scenario testing. In response to this, the Group may implement de-risking strategies to mitigate against unwanted outcomes. The Group also maintains substantial cash buffers in its holding companies to reduce reliance on emerging cash flows.
The potential limitation on distributions from the Group's PRA / FCA regulated companies may impair the ability of the Group to meet its cash flow obligations. 

The Group has cash flow obligations and targets. In the event that transfers from the Group's insurance subsidiaries are limited by anylaw, regulatory action or change in established approach, this mayimpair the Group's ability to service these obligations. The implementation of regulatory directives and other legislative changes such as Solvency II could have this effect and may therefore have a material adverse effect on the Group's results, financial condition and cash flows.

The Group puts considerable effort intomanaging relationships with its regulators so that it is able to maintain aforward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on its operations and lobbies where appropriate.
Significant counterparty failure.

Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities. Phoenix Life is also exposed to the risk of its trading counterparties failing to meet all or part of their obligations, such as outsourcers failing to deliver against their commitments or reinsurers failing to meet obligations assumed under Reinsurance arrangements. An increase in credit spreads on debt securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group's financial condition.

The Group regularly monitors its counterparty exposure and has specific limits relating to counterparty credit rating. Where possible, exposures are diversified through the use of a range of counterparty providers. All Reinsurance and derivative positions are appropriately collateralised and guaranteed. Outsourcer arrangements are closelymonitored. 
Adverse changes in experience versus actuarial assumptions.

The Group has liabilities under annuities and other policies that are sensitive to future longevity and mortality rates. Changes in assumptions may lead to changes in the assessed level of liabilities to policyholders. The amount of additional capital required to meet those liabilities could have a material adverse impact on the Group's embedded value, results, financial condition and prospects.

The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions.
Uncertainty in policyholder behaviour in light of the current significant level of change in the regulatory landscape.

A significant degree of uncertainty for policyholders has been created by announcements in the first half of 2014 relating to workplace pensions, annuities and products sold to long standing customers. Helping customers to make informed decisions that are appropriate for their personal circumstances is a priority for the Group. 

The Group has initiated projects to manage both the operational and strategic implications of these key regulatory changes. It is actively involved in related industry working groups ensuring we gain early insight into emerging thinking, but also providing an opportunity to influence industry direction. 
IFRS Financial Statements
STATEMENT OF DIRECTORS' RESPONSIBILITIES
20
Auditor'S review report
21
Condensed consolidated interim

financial statements and notes
22
Additional life company asset disclosures
56
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Board of Directors of Phoenix Group Holdings hereby confirms that, to the best of its knowledge:
 the condensed consolidated interim financial statements for the half year ended 30 June 2014, which have been prepared in accordance with IAS 34 Interim Financial Reporting, gives a fair view of the assets, liabilities, financial position and results of Phoenix Group Holdings and its consolidated subsidiaries taken as whole;
 the Interim Report includes a fair view of the state of affairs of Phoenix Group Holdings and its consolidated subsidiaries as at 30 June 2014 and for the financial half year to which the Interim Report relates. 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 and its consolidated subsidiaries for the remaining six months of the year; and
 the Interim Report includes a fair view of the information required on material transactions with related parties and any material changes inthe related party transactions described in the last annual report.
CLIVE BANNISTER  JAMES McCONVILLE
Group Chief Executive Group Finance Director

St Helier, Jersey
20 August 2014
Auditor's review report
To: The Board of Directors of Phoenix Group Holdings
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the Interim Report for the six months ended 30 June 2014 which comprises the condensed consolidated income statement, the condensed statement of consolidated comprehensive income, the pro forma reconciliation of Group operating profit to result attributable to owners, the condensed statement ofconsolidated financial position, the condensed statement of consolidated cash flows, the condensed statement of consolidated changes in equity and the related notes on pages 31 to 55. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410(UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. 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.
Directors' Responsibilities
The Interim Report is the responsibility of, and has been approved by, the Directors.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRS'). The condensed set of financial statements included in this Interim Report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting'.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Interim Report based on our review.
Scope
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim 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 Ireland) 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.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim Report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34.
Ernst & Young LLP
London
20 August 2014
CONDENSED Consolidated income statement
For the half year ended 30 June 2014
Notes
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Continuing operations
Gross premiums written

513
672
1,333
Less: premiums ceded to reinsurers

(31)
(37)
11
Net premiums written

482
635
1,344





Fees 

59
67
132
Net investment income

2,043
942
2,747
Total revenue, net of reinsurance payable

2,584
1,644
4,223
Gain on transfer of business
3
4
-
42
Other operating income

5
4
7
Net income

2,593
1,648
4,272





Policyholder claims

(1,888)
(2,443)
(4,830)
Less: reinsurance recoveries

109
274
464
Change in insurance contract liabilities

56
2,526
3,411
Change in reinsurers' share of insurance contract liabilities

12
(832)
(710)
Transfer to unallocated surplus

(19)
(38)
(77)
Net policyholder claims and benefits incurred

(1,730)
(513)
(1,742)





Change in investment contract liabilities

(187)
(573)
(1,156)
Acquisition costs

(5)
(5)
(10)
Change in present value of future profits

(8)
6
9
Amortisation of acquired in-force business

(53)
(58)
(111)
Amortisation of customer relationships

(7)
(7)
(16)
Administrative expenses

(202)
(211)
(444)
Net income attributable to unitholders

(29)
(171)
(331)
Total operating expenses

(2,221)
(1,532)
(3,801)





Profit before finance costs and tax

372
116
471





Finance costs

(82)
(129)
(230)
Profit/(loss) for the period before tax

290
(13)
241





Tax attributable to policyholders' returns

(32)
29
27
Profit before the tax attributable to owners

258
16
268





Tax (charge)/credit
6.1
(81)
27
1
Add: tax attributable to policyholders' returns

32
(29)
(27)
Tax charge attributable to owners

(49)
(2)
(26)
Profit from continuing operations for the period attributable to owners

209
14
242
Discontinued operations
Loss from discontinued operations, net of tax
3.1
(18)
(22)
(35)
Profit/(loss) for the period attributable to owners

191
(8)
207
Notes
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Attributable to




Owners of the parent 

144
(27)
145
Non-controlling interests

47
19
62


191
(8)
207
Earnings/(loss) per share




Basic earnings/(loss) per share
7.1
64.1p
(13.1)p
68.2p
Diluted earnings/(loss) per share
7.2
64.1p
(13.1)p
68.1p
Earnings/(loss) per share from continuing operations




Basic earnings/(loss) per share from continuing operations
7.1
72.3p
(3.0)p
85.3p
Diluted earnings/(loss) per share from continuing operations
7.2
72.3p
(3.0)p
85.2p
Condensed statement of consolidated comprehensive income
For the half year ended 30 June 2014
Notes
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Profit for the period from continuing operations
Loss from discontinued operations

209
(18)
14
(22)
242
(35)


191
(8)
207
Other comprehensive income/(expense):




Items that are or may be reclassified to profit or loss:




Foreign exchange rate movements

(8)
13
-
Reclassification adjustments relating to foreign collective investment schemes disposed of in the period

-
-
8





Items that will not be reclassified to profit or loss:




Remeasurements of net defined benefit asset/liability

71
(9)
-
Tax relating to other comprehensive income items
6.2
8
-
(12)





Total comprehensive income/(expense) for the period

262
(4)
203





Attributable to:




Owners of the parent

215
(23)
141
Non-controlling interests
10
47
19
62


262
(4)
203
PRO FORMA RECONCILIATION OF GROUP OPERATING PROFIT TO RESULT ATTRIBUTABLE TO OWNERS
For the half year ended 30 June 2014
Notes
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Operating profit




Phoenix Life

256
178
414
Ignis Asset Management - discontinued operation

17
19
49


273
197
463
Group costs

(7)
(11)
(24)
Total operating profit before adjusting items

266
186
439





Investment return variances and economic assumption changes onlongterm business
5.3
59
(13)
64
Variance on owners' funds
5.2
-
(20)
(31)
Amortisation on acquired in-force business

(48)
(51)
(99)
Amortisation of customer relationships

(7)
(9)
(19)
Non-recurring items
4.2
9
(40)
(11)
Profit before finance costs attributable to owners

279
53
343





Finance costs attributable to owners

(48)
(65)
(126)
Profit/(loss) before the tax attributable to owners:
From continuing operations
From discontinued operations
3.1
258
(27)
16
(28)
268
(51)
Tax charge attributable to owners from continuing operations
Tax credit attributable to owners from discontinued operations
6.1
3.1
231
(49)
9
(12)
(2)
6
217
(26)
16
Profit/(loss) for the period attributable toowners

191
(8)
207
Condensed statement of consolidated financialposition
As at 30 June 2014
Notes
30 Jun 2014
m
30 Jun 2013
Restated
m
31 Dec 2013
Restated
m
EQUITY AND LIABILITIES









Equity attributable to owners of the parent




Share capital
9
-
-
-
Share premium

1,038
1,156
1,097
Shares held by employee benefit trust and Group entities

(14)
(14)
(13)
Foreign currency translation reserve

85
98
93
Retained earnings

951
566
732




Total equity attributable to owners of the parent

2,060
1,806
1,909





Non-controlling interests
10
825
711
778





Total equity

2,885
2,517
2,687





Liabilities




Pension scheme liability
11
98
192
137





Insurance contract liabilities




Liabilities under insurance contracts
12
42,657
43,587
42,729
Unallocated surplus

989
931
970







43,646
44,518
43,699
Financial liabilities




Investment contracts

8,508
8,327
8,578
Borrowings
13
2,285
2,527
2,359
Deposits received from reinsurers

384
412
385
Derivatives

1,616
2,783
2,161
Net asset value attributable to unitholders

5,431
5,767
5,744
Obligations for repayment of collateral received

5,324
9,344
7,284






14.1
23,548
29,160
26,511





Provisions

26
58
53





Deferred tax

335
364
373





Reinsurance payables

12
12
12
Payables related to direct insurance contracts

402
414
395
Current tax

149
73
107
Accruals and deferred income

92
129
139
Other payables

1,514
2,468
307
Liabilities classified as held for sale
3.2
111
5,121
49





Total liabilities

69,933
82,509
71,782




Total equity and liabilities

72,818
85,026
74,469
Notes
30 Jun 2014
m
30 Jun 2013
Restated
m
31 Dec 2013
Restated
m
ASSETS









Pension scheme asset
11
276
139
160





Intangible assets




Goodwill

39
96
96
Acquired in-force business

1,458
1,564
1,511
Customer relationships and other intangibles

225
376
368
Present value of future profits

24
29
32







1,746
2,065
2,007





Property, plant and equipment

15
23
23





Investment property

1,683
1,657
1,603





Financial assets




Loans and receivables

1,560
2,271
1,977
Derivatives

1,349
2,674
1,966
Equities

13,869
13,539
13,913
Investment in joint ventures

118
104
125
Fixed and variable rate income securities

35,643
38,529
35,460
Collective investment schemes

2,438
4,088
3,767






14.1
54,977
61,205
57,208
Insurance assets




Reinsurers' share of insurance contract liabilities

2,854
2,724
2,851
Reinsurance receivables

35
28
34
Insurance contract receivables

10
9
12







2,899
2,761
2,897





Current tax

7
7
6
Prepayments and accrued income

421
488
462
Other receivables

1,737
2,379
743
Cash and cash equivalents

8,692
9,334
9,294
Assets classified as held for sale
3.2
365
4,968
66





Total assets

72,818
85,026
74,469
Condensed statement of consolidated cashflows
For the half year ended 30 June 2014
Notes
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Cash flows from operating activities




Cash (utilised)/generated by operations

(310)
765
1,023
Taxation paid

(30)
(4)
(11)
Net cash flows from operating activities

(340)
761
1,012





Cash flows from investing activities




Proceeds from disposal of business
3.3
21
- 
-





Cash flows from financing activities




Proceeds from issuing ordinary shares, net of associated commission and expenses

-
233
233
Proceeds from issuing shares in subsidiaries to non-controlling interests

33
- 
37
Ordinary share dividends paid
8
(60)
(60)
(120)
Coupon on Perpetual Reset Capital Securities paid

(26)
(26)
(26)
Dividends paid to non-controlling interests
10
(12)
(12)
(25)
Arrangement and structuring fees associated with the re-terming of the Impala loan facility

-
(21)
(21)
Repayment of policyholder borrowings

(15)
(11)
(33)
Repayment of shareholder borrowings

(83)
(533)
(694)
Interest paid on policyholder borrowings

(4)
(4)
(18)
Interest paid on shareholder borrowings

(48)
(78)
(136)
Net cash flows from financing activities

(215)
(512)
(803)





Net (decrease)/increase in cash and cash equivalents

(534)
249
209
Cash and cash equivalents at the beginning of the period

9,294
9,085
9,085
Cash and cash equivalents at the end of the period

8,760
9,334
9,294
Cash flows relating to discontinued operations are disclosed in note 3.1
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2014
Share capital
(note 9)
m
Share premium
m
Shares
held by employee benefit trust and Group entities
m
Foreign currency translation reserve
m
Retained earnings
m
Total
m
Non-controlling interests (note 10)
m
Total
m
At 1 January 2014
-
1,097
(13) 
93
732
1,909
778
2,687









Profit for the period
-
-
-
-
144
144
47
191
Other comprehensive (expense)/income forthe period
-
-
-
(8)
79
71
-
71
Total comprehensive (expense)/income for theperiod
-
-
-
(8)
223
215
47
262









Dividends paid on ordinary shares(note 8)
-
(60)
-
-
-
(60)
-
(60)
Dividends paid on shares held by the employee benefit trust and Group entities
-
1
-
-
-
1
-
1
Dividends paid to non-controlling interests
-
-
-
-
-
-
(12)
(12)
Coupon paid to non-controlling interests, net of tax relief
-
-
-
-
-
-
(21)
(21)
Credit to equity for equity-settled share-based payments
-
-
-
-
3
3
-
3
Shares subscribed for by non-controlling interests
-
-
-
-
-
-
33
33
Shares distributed by employee benefittrust
-
-
7
-
(7)
-
-
-
Shares acquired by employee benefit trust
-
-
(8)
-
-
(8)
-
(8)
At 30 June 2014
-
1,038
(14)
85
951
2,060
825
2,885
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2014
Share capital
(note 9)
m
Share premium
m
Other
reserves
m
Shares
held by employee benefit
trust and Group
entities
m
Foreign currency translation reserve
m
Retained earnings
m
Total
m
Non-
controlling interests
(note 10)
m
Total
m
At 1 January 2013
-
982
5
(10)
85
596
1,658
724
2,382










(Loss)/profit for the period
-
-
-
-
-
(27)
(27)
19
(8)
Other comprehensive income/(expense) for theperiod
-
-
-
-
13
(9)
4
-
4
Total comprehensive income/(expense) for theperiod
-
-
-
-
13
(36)
(23)
19
(4)










Issue of ordinary share capital, net of associated commissions and expenses
-
233
-
-
-
-
233
-
233
Dividends paid on ordinary shares (note 8)
-
(60)
-
-
-
-
(60)
-
(60)
Dividends paid on shares held by the employee benefit trust and Group entities
-
1
-
-
-
-
1
-
1
Dividends paid to non-controlling interests
-
-
-
-
-
-
-
(12)
(12)
Coupon paid to non-controlling interests, net of tax relief
-
-
-
-
-
-
-
(20)
(20)
Credit to equity for equity-settled share-based payments
-
-
-
-
-
3
3
-
3
Shares distributed by employee benefit trust
-
-
-
2
-
(2)
-
-
-
Shares acquired by employee benefit trust
-
-
-
(6)
-
-
(6)
-
(6)
Expired contingent rights 
-
-
(5)
-
-
5
-
-
-
At 30 June 2013
-
1,156
-
(14)
98
566
1,806
711
2,517
Condensed statement of consolidated changes in equity
For the half year ended 30 June 2014
Share capital
(note 9)
m
Share premium
m
Other
reserves
m
Shares
held by employee benefit
trust and Group
entities
m
Foreign currency translation reserve
m
Retained earnings
m
Total
m
Non-
controlling interests
(note 10)
m
Total
m
At 1 January 2013
-
982
5
(10)
85
596
1,658
724
2,382










Profit for the period
-
-
-
-
-
145
145
62
207
Other comprehensive income/ (expense) forthe period
-
-
-
-
8
(12)
(4)
-
(4)
Total comprehensive income forthe period
-
-
-
-
8
133
141
62
203










Issue of ordinary share capital, net of associated commissions and expenses 
-
233
-
-
-
-
233
-
233
Dividends paid on ordinary shares
-
(120)
-
-
-
-
(120)
-
(120)
Dividends paid on shares held by the employee benefit trust and Group entities
-
2
-
-
-
-
2
-
2
Dividends paid to non-controlling interests
-
-
-
-
-
-
-
(25)
(25)
Coupon paid to non-controlling interests, net of tax relief
-
-
-
-
-
-
-
(20)
(20)
Credit to equity for equity-settled share-based payments
-
-
-
-
-
6
6
-
6
Shares in subsidiaries subscribed for by non-controlling interests
-
-
-
-
-
-
-
37
37
Shares distributed by employee benefit trust
-
-
-
8
-
(8)
-
-
-
Shares acquired by employee benefit trust
-
-
-
(11)
-
-
(11)
-
(11)
Expired contingent rights
-
-
(5)
-
-
5
-
-
-
At 31 December 2013
-
1,097
-
(13)
93
732
1,909
778
2,687
Notes to the condensed consolidated interimfinancial statements
1. Basis of preparation
The condensed consolidated interim financial statements ('the interim financial statements') for the half year ended 30 June 2014 comprise the interim financial statements of Phoenix Group Holdings ('the Company') and its subsidiaries (together referred to as 'the Group') as set out on pages 22 to 55 and were authorised by the Board of Directors for issue on 20 August 2014. The interim financial statements are unaudited but have been reviewed by the auditors, Ernst & Young LLP and their review report appears on page 21.
The interim financial statements have been prepared, effective from 1 January 2014, in accordance with the International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'). The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the IASB and in accordance with the accounting policies set out in the 2013 consolidated financial statements except for the following:
 the basis of preparation for the Group's consolidated financial statements has been amended from IFRSs adopted for use in the European Union to IFRSs issued by the IASB, effective from 1 January 2014;
 the adoption of IFRS 10 Consolidated Financial statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 28 Investments in Associates and Joint Ventures (Revised). As a result of adopting the new basis of preparation in 2014, these standards have an initial application date of 1 January 2013; and
 the adoption of other new accounting standards, interpretations and amendments effective as of 1 January 2014 which are referred tobelow.
The interim financial statements do not include all the information and disclosures required in the 2013 consolidated financial statements, and should be read in conjunction with the Group's 2013 Annual Report and Accounts.
The adoption of IFRS 10 and IFRS 11 with an initial application date of 1 January 2013, requires the restatement of previous financial statements. The impact of IFRS 10 on the interim financial statements is explained in note 2. The adoption of IFRS 11 results in the presentation of a property investment structure as an investment in joint ventures within financial assets (previously disclosed as an equityinvestment). As a result of the Group's accounting policy to value interests in joint ventures at fair value through profit or loss therehas been no change in the measurement basis. The application of IFRS 12 will result in additional disclosures in the 2014 annual consolidated financial statements.
In preparing the interim financial statements the Group has adopted the following standards, interpretations and amendments effective from 1 January 2014:
 Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements. The exceptionto consolidation requires investment entities to account for subsidiaries at fair value through profit or loss.
 Offsetting Financial Assets and Financial Liabilities - Amendments for IAS 32. These amendments clarify the meaning of 'currently hasalegally enforceable right to set-off' and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify foroffsetting.
 Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39. These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria.
 Receivable Amount Disclosures for Non-Financial Assets. These amendments remove the unintended consequences of IFRS 13 Fair Value Measurement on the disclosures required under IAS 36 Impairment of Assets. In addition, these amendments require disclosure ofthe recoverable amounts for the assets or cash-generating units for which an impairment loss has been recognised or reversed during the period.
These standards, interpretations or amendments have been applied for the first time in 2014 and do not impact the 2014 interim financial statements. There is also not expected to be a significant impact on the 2014 consolidated financial statements.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the interim financial statements.
2. Changes in accounting policies
The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the 2013 consolidated financial statements except for the adoption of IFRS 10 Consolidated Financial Statements.
As a result of the Group changing its basis of preparation to IFRSs issued by the IASB, the effective date of application of IFRS 10 by the Group is now 1 January 2013.
IFRS 10 replaces the parts of the previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation - Special Purpose Entities, and establishes a single control model that applies to all entities including special purpose entities. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, orhas rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over theinvestee.
Subsidiary undertakings are those entities over which the Group has control. The Group controls an investee if and only if the Group has all the following:
 Power over the investee;
 Exposure, or rights, to variable returns from its involvement with the investee; and
 The ability to use its power over the investee to affect its returns.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control.
The Group is invested in a number of collective investment schemes which in turn invest in a range of financial assets. The Group's percentage ownership in these collective investment schemes can fluctuate according to the Group's and third party participation in them. When assessing the control over these collective investment schemes the Group considers the scope of its decision making authority including its ability to direct the relevant activities of the fund, powers of veto and exposure to variability of returns. The Group also assessessubstantive removal rights that may affect the Group's ability to direct the relevant activities.
The following table summarises the financial effects on the condensed consolidated income statement, condensed statement of consolidated financial position and condensed statement of consolidated cash flows on implementation of the new accounting policy:
Year ended
31 Dec 2013
m
Half year
ended
30 Jun 2013
m
Condensed consolidated income statement


Net investment income
80
44
Other operating income
(1)
-
Administrative expenses
(1)
(2)
Net income attributable to unitholders
(79)
(42)
Finance costs
1
-
Profit for the period
-
-



Condensed statement of consolidated financial position


Total assets:


Derivatives
18
4
Equities
2,602
2,336
Investment in joint ventures
125
104
Fixed and variable rate income securities
198
301
Collective investment schemes
(2,623)
(2,317)
Cash and cash equivalents
70
71
Other assets
6
14
Total assets
396
513
Total liabilities:


Derivatives
5
5
Net asset value attributable to unitholders
435
498
Other payables
(44)
10
Total liabilities
396
513
Year ended
31 Dec 2013
m
Half Year
ended
30 Jun 2013
m
Condensed statement of consolidated cash flows


Cash (utilised)/generated by operations
13
14
The change in accounting policy had no impact on net assets or on earnings per share as at 31 December 2013 or 30June2013.
3. Discontinued operations and assets and liabilities held for sale
This note provides details of the discontinued operations of Ignis Asset Management, assets and liabilities held for sale at the period end and the disposal of a general insurance subsidiary undertaking.
3.1 Discontinued operations
On 25 March 2014, the Group and Standard Life Investments (Holdings) Limited ('Standard Life Investments') signed a disposal agreement under which Standard Life Investments agreedto acquire the entire issued share capital of Ignis Asset Management in return for gross cash consideration of 390 million. The divestment was completed on 1 July 2014. The business has been included in the Ignis Asset Management operating segment at30June 2014. The results of Ignis Asset Management are as follows:
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Fees 
26
19
48
Net investment income
(6)
-
7
Total revenue
20
19
55




Amortisation of customer relationships
-
(2)
(3)
Administrative expenses
(47)
(45)
(103)
Total operating expenses
(47)
(47)
(106)




Loss before tax
(27)
(28)
(51)
Tax credit attributable to owners
9
6
16
Loss after tax for the period from a discontinued operation
(18)
(22)
(35)
The loss before tax for the period from a discontinued operation excludes intra-group fee income of 38 million (half year ended 30 June 2013: 43 million; year ended 31 December 2013: 102 million). This intra-group fee income represents the difference between the loss before tax for the period from discontinued operations and the Ignis Asset Management segmental result before tax attributable to owners result shown in note 4.1.
The loss for the period from discontinued operations was entirely attributable to the owners of the parent.
The net cash flows generated/(utilised) by Ignis Asset Management are as follows:
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Cash flows from operating activities
31
11
17
Cash flows from financing activities
(29)
-
(14)
Net cash inflow
2
11
3




Loss per share 



Basic loss per share from discontinued operations (note 7.1)
(8.2)p
(10.1)p
(17.1)p
Diluted loss per share from discontinued operations (note 7.2)
(8.2)p
(10.1)p
(17.1)p
3.2 Assets and liabilities of operations classified as held for sale
The balances transferred to assets and liabilities classified as held for sale in the statement of consolidated financial position as at 30 June 2014 relate to Ignis Asset Management (see 3.1 above). The balances as at 31 December 2013 related to BA(GI) Limited ('BAGI') (see 3.3 below) and the balances as at 30 June 2013 related to the Part VII transfer of a portfolio of wholly reinsured annuity liabilities to Guardian Assurance Limited ('Guardian') which completed in September 2013 and BAGI.

Carrying amount
30 Jun 2014
m
Carrying
amount
30 Jun 2013
m
Carrying
amount
31 Dec 2013
m
Assets classified as held for sale:



Goodwill
57
19
-
Acquired in-force business
-
138
-
Customer relationships and other intangibles
136
-
-
Financial assets
37
55
55
Reinsurer's share of insurance contract liabilities
-
4,747
-
Property, plant and equipment
8
-
-
Cash and cash equivalents
68
-
-
Other assets
59
9
11

365
4,968
66




Liabilities classified as held for sale:



Liabilities under insurance contracts
-
5,050
-
Deferred tax liabilities
27
23
-
Payables related to direct insurance contracts
-
47
48
Provisions
23
-
-
Other liabilities
61
1
1

111
5,121
49
3.3 Disposal of BAGI
The Group completed the sale of its entire interest in BAGI to National Indemnity Company on 18 March 2014 for cash consideration of 21million. The carrying value of the net assets transferred was 17 million, resulting in a pre-tax gain of 4 million. Assets and liabilities classified as held for sale as at 30 June 2013 and 31 December 2013 are no longer included in the consolidated statement of financial position.
3.4 Annuity liabilities transfer
The Group entered into a reinsurance agreement, effective 1 July 2012, to reinsure certain portfolios of the Group's annuity liabilities to Guardian in exchange for the transfer of financial assets of 5.1 billion. The business was transferred to Guardian on 30 September 2013 using a scheme under Part VII of the Financial Services and Markets Act 2000 approved by the High Court on 12 September 2013.
As part of the Part VII transfer, the Group paid 78 million consideration to Guardian in connection with the ongoing servicing of the transferred policies. Net liabilities disposed of were 143 million and the Group recognised a gain on transfer of 65 million, comprising 42million within gain on transfer of business and 23 million within tax (charge)/credit attributable to owners in the consolidated income statement for the year ending 31 December 2013.
4. Segmental analysis
The Group defines and presents operating segments based on the information which is provided to the Board.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.
For management purposes, the Group is organised into business units based on their products and services and had two operating segments during the reporting period as follows:
 Phoenix Life - this segment manages a range of whole life, term assurance and pension products; and
 Ignis Asset Management - this segment provides investment management services to the life companies within the Group and to third parties, covering both retail and institutional investors. This segment has been disposed of effective 1 July 2014 (see note 3).
Segment performance is evaluated based on profit or loss which, in certain respects, is presented differently from profit or loss in the consolidated financial statements. Group financing (including finance costs) and owners' taxes are managed on a Group basis and are not allocated to individual operating segments.
Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segment results include those transfers between business segments which are then eliminated on consolidation.
4.1 Segmental result
Half year ended 30 June 2014
Phoenix Life
m
Ignis Asset Management
m
Unallocated
Group
m
Eliminations
m
Discontinued operation
eliminations
m
Total
m
Net premiums written from:






External customers
482
-
-
-
-
482







Fees from:






External customers
59
26
-
-
(26)
59
Other segment
-
38
-
(38)
-
-

59
64
-
(38)
(26)
59
Net investment income:






Recurring
2,035
-
6
-
-
2,041
Non-recurring
-
(6)
2
-
6
2

2,035
(6)
8
-
6
2,043
Other operating income:






Recurring
5
-
-
-
-
5
Gain on transfer of business:






Non-recurring
-
-
4
-
-
4







Net income
2,581
58
12
(38)
(20)
2,593







Net policyholder claims and benefits incurred:






Recurring
(1,730)
-
-
-
-
(1,730)







Depreciation and amortisation:






Depreciation of property, plant and equipment
-
-
-
-
-
-
Amortisation of acquired in-force business
(53)
-
-
-
-
(53)
Amortisation of customer relationships
(7)
-
-
-
-
(7)

(60)
-
-
-
-
(60)
Other operating expenses:






Recurring 
(464)
(47)
(14)
38
47
(440)
Non-recurring
(57)
-
66
-
-
9

(521)
(47)
52
38
47
(431)







Total operating expenses
(2,311)
(47)
52
38
47
(2,221)






Profit before finance costsand tax
270
11
64
-
27
372
Finance costs
(34)
-
(48)
-
-
(82)







Profit before tax
236
11
16
-
27
290
Tax attributable to policyholders' returns
(32)
-
-
-
-
(32)
Segmental result before the tax attributable toowners
204
11
16
-
27
258
Half year ended 30 June 2013 Restated
Phoenix Life
m
Ignis Asset Management
m
Unallocated
Group
m
Eliminations
m
Discontinued operation
eliminations
m
Total
m
Net premiums written from:






External customers
635
-
-
-
-
635







Fees from:






External customers
67
19
-
-
(19)
67
Other segment
-
43
-
(43)
-
-

67
62
-
(43)
(19)
67
Net investment income:






Recurring
942
-
-
-
-
942
Other operating income:






Recurring
4
-
-
-
-
4







Net income
1,648
62
-
(43)
(19)
1,648







Net policyholder claims and benefits incurred:






Recurring
(513)
-
-
-
-
(513)
Depreciation and amortisation:






Depreciation of property, plant and equipment
-
(2)
-
-
2
-
Amortisation of acquired in-force business
(58)
-
-
-
-
(58)
Amortisation of customer relationships
(7)
(2)
-
-
2
(7)

(65)
(4)
-
-
4
(65)
Other operating expenses:






Recurring 
(959)
(41)
-
43
41
(916)
Non-recurring
(11)
(2)
(27)
-
2
(38)

(970)
(43)
(27)
43
43
(954)






Total operating expenses
(1,548)
(47)
(27)
43
47
(1,532)






Profit/(loss) before finance costsand tax
100
15
(27)
-
28
116
Finance costs
(64)
-
(65)
-
-
(129)







Profit/(loss) before tax
36
15
(92)
-
28
(13)
Tax attributable to policyholders' returns
29
-
-
-
-
29
Segmental result before the tax attributable toowners
65
15
(92)
-
28
16
Year ended 31 December 2013 Restated
Phoenix Life
m
Ignis Asset Management
m
Unallocated
Group
m
Eliminations
m
Discontinued operation
eliminations
m
Total
m
Net premiums written from:






External customers
1,344
`-
-
-
-
1,344






Fees from:






External customers
132
48
-
-
(48)
132
Other segment
-
102
-
(102)
- 
-

132
150
-
(102)
(48)
132
Net investment income






Recurring
2,748
-
(1)
-
-
2,747
Non-recurring
-
7
-
-
(7)
-

2,748
7
(1)
-
(7)
2,747
Other operating income:






Recurring
7
-
-
-
-
7
Gain on transfer of business:






Non-recurring
42
-
-
-
-
42







Net income
4,273
157
(1)
(102)
(55)
4,272







Net policyholder claims andbenefits incurred:






Recurring 
(1,742)
-
-
-
-
(1,742)
Depreciation and amortisation:






Depreciation of property, plant and equipment
-
(3)
-
-
3
-
Amortisation of acquired in-force business
(111)
-
-
-
-
(111)
Amortisation of customer relationships
(16)
(3)
-
-
3
(16)

(127)
(6)
-
-
6
(127)
Other operating expenses:






Recurring 
(1,989)
(98)
13
102
98
(1,874)
Non-recurring
(11)
(2)
(47)
-
2
(58)

(2,000)
(100)
(34)
102
100
(1,932)







Total operating expenses
(3,869)
(106)
(34)
102
106
(3,801)







Profit before finance costsand tax
404
51
(35)
-
51
471
Finance costs
(104)
-
(126)
-
-
(230)






Profit/(loss) before tax
300
51
(161)
-
51
241
Tax attributable to policyholders' returns
27
-
-
-
-
27
Segmental result before the tax attributable toowners
327
51
(161)
-
51
268
4.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result
Half year ended 30 June 2014
Phoenix
Life
m
Ignis Asset Management
m
Unallocated
Group
m
Total
m
Operating profit/(loss) before adjusting items
256
17
(7)
266
Investment return variances and economic assumption changes
on long-term business
59
-
-
59
Variance on owners' funds
1
-
(1)
-
Amortisation of acquired in-force business
(48)
-
-
(48)
Amortisation of customer relationships
(7)
-
-
(7)
Non-recurring items
(57)
(6)
72
9
Finance costs attributable to owners
-
-
(48)
(48)
Segment result before the tax attributable to owners
204
11
16
231
Adjust for:




Loss before the tax attributable to owners from discontinued operations (seenote 3.1)



27
Profit before tax attributable to owners from continuing operations



258
Operating profit/(loss) before adjusting items




Non-recurring items include:
 income received in relation to the close-out of the PGL Pension Scheme longevity agreement with the with-profit funds of 68 million;
 capitalised VAT costs on future investment management expenses arising as a result of the divestment of Ignis of 27 million;
 costs associated with external regulatory changes with regard to the cap on workplace pension charges of 14 million;
 corporate project costs of 11 million; and
 net other one-off items totalling a cost of 7 million.
Half year ended 30 June 2013
Phoenix
Life
m
Ignis Asset Management
m
Unallocated
Group
m
Total
m
Operating profit/(loss) before adjusting items
178
19
(11)
186
Investment return variances and economic assumption changes
on long-termbusiness
(13)
-
-
(13)
Variance on owners' funds
(31)
-
11
(20)
Amortisation of acquired in-force business
(51)
-
-
(51)
Amortisation of customer relationships
(7)
(2)
-
(9)
Non-recurring items
(11)
(2)
(27)
(40)
Finance costs attributable to owners
-
-
(65)
(65)
Segment result before the tax attributable to owners
65
15
(92)
(12)
Adjust for:




Loss before the tax attributable to owners from discontinued operations
(see note 3.1)



28
Profit before tax attributable to owners from continuing operations



16
Non-recurring items include:
 arrangement and structuring fees of 21 million associated with the re-terming of the Impala loan facility;
 regulatory change and systems transformation costs of 10 million; and
 restructuring costs and other one-off items of 9 million.
Year ended 31 December 2013
Phoenix
Life
m
Ignis Asset Management
m
Unallocated
Group
m
Total
m
Operating profit/(loss) before adjusting items
414
49
(24)
439
Investment return variances and economic assumption changes
on long-term business
64
-
-
64
Variance on owners' funds
(67)
-
36
(31)
Amortisation of acquired in-force business
(99)
-
-
(99)
Amortisation of customer relationships
(16)
(3)
-
(19)
Non-recurring items
31
5
(47)
(11)
Finance costs attributable to owners
-
-
(126)
(126)
Segment result before the tax attributable to owners
327
51
(161)
217
Adjust for:




Loss before the tax attributable to owners from discontinued operations
(see note 3.1)



51
Profit before tax attributable to owners from continuing operations



268
Non-recurring items include:
 arrangement and structuring fees of 21 million associated with the extinguishment and re-terming of the Impala loan facility;
 gain on transfer of business of 42 million (see note 3.4);
 regulatory change and systems transformation costs of 25 million;
 net settlement cost of pension liability management initiatives of 9 million; and
 net other items of positive 2 million includes a gain on the reinsurance agreement with Guardian offset by corporate project costs.
5. Investment return variances and economic assumption changes
The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.
5.1 Life assurance business
Operating profit for life assurance business is based on expected investment returns on financial investments backing owners' and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.
For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The investment variances and economic assumption changes excluded from the long-term business operating profit reflect the impact of the increase in credit spreads on corporate bonds and movements in equities, properties and yields.
5.2 Owners' funds
For non long-term business including owners' funds, the total investment income, including fair value gains, is analysed between acalculated long-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners' funds are as follows:
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Variance on owners' funds of:



Subsidiary undertakings
(4)
(19)
(29)
The Company
4
(1)
(2)

-
(20)
(31)
The negative variance on owners' funds of subsidiary undertakings of 4 million primarily relates to fair value losses on swap and equity hedging positions heldwithin the shareholder funds. The variance on owners' funds of the Company comprises fair value gains arising frommovements in the fair value of warrants in issue over the Company's shares.
5.3 Calculation of the long-term investment return
The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based onmarket yields on risk-free fixed interest assets at the start of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields, to obtain investment return assumptions for equities and properties.
The principal assumptions underlying the calculation of the long-term investment return are:
Half year
ended
30 Jun 2014
%
Half year
ended
30 Jun 2013
%
Year
ended
31 Dec 2013
%
Equities
6.6
5.4
5.4
Properties
5.6
4.4
4.4
Gilts (15 year gilt)
3.6
2.4
2.4
Other fixed interest
4.6
3.4
3.4
6. Tax charge/(CREDIT)
6.1 Current period tax CHARGE/(credit) from continuing operations
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Current tax:



UK corporation tax
74
11
62
Overseas tax
14
9
14

88
20
76
Adjustment in respect of prior years
(1)
(4)
(8)
Total current tax charge
87
16
68




Deferred tax:



Origination and reversal of temporary differences
(7)
(64)
(62)
Change in the rate of UK corporation tax
1
-
(32)
Movement in unrecognised deferred tax
-
21
25
Total deferred tax credit
(6)
(43)
(69)
Total tax charge/(credit)
81
(27)
(1)




Attributable to: 



- Policyholders
32
(29)
(27)
- Owners
49
2
26

81
(27)
(1)
The Group, as a proxy for policyholders in the UK, is required to pay taxes on policyholder investment income and gains each year. Accordingly, the tax benefit or charge attributable to UK life assurance policyholder earnings is included in income tax. The tax charge/(benefit) attributable to policyholder earnings was 32 million (half year ended 30 June 2013: (29) million; year ended 31December2013: (27)million).
The tax credit for the period from discontinued operations is shown in note 3.1.
6.2 Tax (credited)/charged to other comprehensive income from continuing operations
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Deferred tax (credit)/charge on defined benefit schemes
(8)
- 
12
6.3 Reconciliation of tax charge/(credit) from continuing operations
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
Restated
m
Year
ended
31 Dec 2013
Restated
m
Profit/(loss) before tax
290
(13)
241
Policyholder tax (charge)/credit
(32)
29
27
Profit before the tax attributable to owners
258
16
268
Tax charge at standard UK1 rate of 21.5% (2013: 23.25%) 
56
4
63
Non-taxable income and gains
(1)
(5)
4
Disallowable expenses
3
3
6
Adjustment to shareholders' tax charge in respect of prior periods
(1)
9
23
Movement on acquired in-force amortisation at less than 21.5% (2013: 23.25%)
1
(1)
-
Profits taxed at rates other than 21.5% (2013: 23.25%)
(5)
(20)
(39)
Deferred tax rate change
-
-
(33)
Current year losses not valued
-
13
-
Temporary differences not valued
(5)
(1)
4
Other
1
-
(2)
Owners' tax charge
49
2
26
Policyholder tax charge/(credit)
32
(29)
(27)
Total tax charge/(credit) for the period
81
(27)
(1)
1 The Group's two operating segments operate predominately in the UK. The reconciliation of the tax credit has, therefore, been completed by reference to the standard rate of UK tax rather than byreference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
The Finance Act 2012 set the rate of corporation tax at 23% from 1 April 2013 and further reductions to 21% from 1 April 2014 and 20% from 1 April 2015 were set by the Finance Act 2013. Consequently, a blended rate of tax has been used for the purposes of providing for deferred tax in these financial statements.
Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit isprobable.
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Deferred tax assets have not been recognised in respect of:



Tax losses carried forward
46
67
50
Excess expenses and deferred acquisition costs
1
2
2
Provisions and other temporary differences
8
2
9
Capital losses2
119
191
121
2 These can only be recognised against future capital gains and have no expiry date.
7. Earnings per share
The earnings/(loss) per share is calculated by reference to the profit/(loss) attributable to owners of the parent divided by the weighted average numbers of shares in issue during each period.
7.1 Basic earnings/(loss) per share
The result attributable to owners of the parent for the purposes of computing earnings per share has been calculated as set out below. Thisis after adjusting for the result attributable to non-controlling interests.
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Profit/(loss) for the period 
191
(8)
207
Share of result attributable to non-controlling interests
(47)
(19)
(62)
Profit/(loss) attributable to owners of the parent
144
(27)
145
Analysed as:



Profit/(loss) attributable to owners of the parent from continuing operations 
162
(5)
180
Loss attributable to owners of the parent from discontinued operations
(18)
(22)
(35)
The weighted average number of ordinary shares outstanding during the period is calculated asfollows:
Half year
ended
30 Jun 2014
No.
million
Half year
ended
30 Jun 2013
No.
million
Year
ended
31 Dec 2013
No.
million
Issued ordinary shares at beginning of the period
225
174
174
Effect of ordinary shares issued
1
37
39
Own shares held by employee benefit trust and Group entities
(1)
(2)
(1)
Weighted average number of ordinary shares 
225
209
212
Basic earnings/(loss) per share is as follows:
Half year
ended
30 Jun 2014
pence
Half year
ended
30 Jun 2013
pence
Year
ended
31 Dec 2013
pence
Basic earnings/(loss) per share from continuing operations
72.3p
(3.0)p
85.3p
Basic loss per share from discontinued operations
(8.2)p
(10.1)p
(17.1)p
Total basic earnings/(loss) per share 
64.1p
(13.1)p
68.2p
7.2 Diluted earnings/(loss) per share
The result attributable to owners for the parent used in the calculation of diluted earnings/(loss) per share is the same as that used in the basic earnings/(loss) per share calculation in 7.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 225 million (half year ended 30 June 2013: 209 million; year ended 31December 2013: 212 million). The Group's deferred BSP share-based scheme increased the weighted average number of shares on a diluted basis by 85,037 for the half year ended 30 June 2014 and by 176,832 shares for the year ended 31 December 2013. As losses have an anti-dilutive effect none of the share-based awards have adilutive effect for the half year ended 30 June 2013.
Diluted earnings/(loss) per share is as follows:
Half year
ended
30 Jun 2014
pence
Half year
ended
30 Jun 2013
pence
Year
ended
31 Dec 2013
pence
Diluted earnings/(loss) per share from continuing operations
72.3p
(3.0)p
85.2p
Diluted loss per share from discontinued operations
(8.2)p
(10.1)p
(17.1)p
Total diluted earnings/(loss) per share 
64.1p
(13.1)p
68.1p
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because they did not have a dilutive effect for the periods presented due to the exercise price of the warrants being significantly higher than the share price of the Company:
 5 million warrants issued to certain entities providing finance to the Group on 2 September 2009;
 12.36 million warrants issued to Royal London on 2 September 2009; and
 IPO warrants from 2 September 2009 on which date the exercise price of the outstanding warrants was increased from 7 to 11.
8. Dividends on ordinary shares
Half year
ended
30 Jun 2014
m
Half year
ended
30 Jun 2013
m
Year
ended
31 Dec 2013
m
Dividend declared and paid in 2014 at 26.7p per share (half year ended 30 June 2013: 26.7p;
yearended31 December 2013: 53.4p)
60
60
120
On 25 March 2014, the Board recommended a dividend of 26.7p per share in respect of the year ended 31 December 2014. Thedividend was approved at the Company's Annual General Meeting, which was held on 30 April 2014. The dividend was settled on 2 May 2014.
9. Share capital
30 Jun 2014
30 Jun 2013
31 Dec 2013
Authorised:



410 million (30 June 2013: 410 million; 31 December 2013: 410 million) ordinarysharesof0.0001 each
31,750
31,750
31,750








Issued and fully paid:



224.9 million (30 June 2013: 224.8 million; 31 December 2013: 224.8 million) ordinaryshares of 0.0001 each
18,421
18,415
18,418
Movements in share capital during the period:
Number
Shares in issue at 1 January 2014
224,818,301 
18,418
Other ordinary shares issued in the period
38,860
3
Shares in issue at 30 June 2014
224,857,161
18,421
Number
Shares in issue at 1 January 2013
174,587,148
14,174
Placement and open offer ordinary shares
50,000,000
4,224
Other ordinary shares issued in the period
198,441
17
Shares in issue at 30 June 2013
224,785,589
18,415
Other ordinary shares issued in the period
32,712
3
Shares in issue at 31 December 2013
224,818,301
18,418
During the year, the Company issued 38,860 shares at a total premium of 213,000 in order to satisfy its obligation to employees under the Group's share schemes.
10. Non-controlling interests
Perpetual ResetCapital Securities
m
UK Commercial Property Trust Limited
m
Total
m
At 1 January 2014
408
370
778
Profit for the period
10
37
47
Dividends paid
-
(12)
(12)
Coupons paid, net of tax relief
(21)
-
(21)
Shares in subsidiaries subscribed for by non-controlling interests
-
33
33
At 30 June 2014
397
428
825
Perpetual ResetCapital Securities
m
UK Commercial Property Trust Limited
m
Total
m
At 1 January 2013
408
316
724
Profit for the period
10
9
19
Dividends paid
-
(12)
(12)
Coupons paid, net of tax relief
(20)
-
(20)
At 30 June 2013
398
313
711
Profit for the period
10
33
43
Dividends paid
-
(13)
(13)
Shares in subsidiaries subscribed for by non-controlling interests
-
37
37
At 31 December 2013
408
370
778
10.1 Perpetual Reset Capital Securities
On 1 January 2010, Pearl Group Holdings (No.1) Limited ('PGH1') had in issue 500 million of Perpetual Reset Capital Securities ('theNotes'). Following amendments made to the Notes during 2010, the aggregate amount payable on redemption of the Notes is425 million. On 25 April 2014, the 2014 coupon that was due on the Notes was settled in full by PGH1, other than to two companies within the Group which waived their right to receive that coupon.
10.2 UK Commercial Property Trust Limited
UK Commercial Property Trust Limited is a property investment vehicle which is domiciled in Guernsey and is admitted to the Official List ofthe UK Listing Authority and to trading on the London Stock Exchange. The Group holds 56% as at 30 June 2014 (year ended 31 December 2013: 58%) of the issued share capital of UKCPT.
11. Pension schemes
The condensed statement of consolidated financial position incorporates the pension scheme asset of the PGL Pension Scheme and the pension scheme liability of the Pearl Group Staff Pension Scheme as at 30 June 2014. The pension scheme asset of the PGL Pension Scheme amounted to 276 million (30 June 2013: 139 million, 31 December 2013: 160 million); this has been adjusted by 22 million (30June 2013: 94 million, 31 December 2013: 95 million) to eliminate on consolidation the carrying value of insurance policies effected by the PGL Pension Scheme with the Group. The pension scheme liability of the Pearl Group Staff Pension Scheme amounted to 98 million (30 June 2013: 192 million, 31 December 2013: 137 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. Pension scheme assets and liabilities are stated after adjusting for the irrecoverable amount of minimum funding requirement obligations.
In accordance with an agreement dated November 2005 in respect of the PGL Pension Scheme, certain of the Group's with-profit funds had indemnified the shareholders in respect of contribution calls equal to their share of the cost of changes in longevity assumptions. In January 2014 PGH1 received 8 million under this agreement. In June 2014 PGH1 and Phoenix Life Limited ('PLL') entered into an agreement whereby in exchange for a payment by the PLL with-profit funds to PGH1 of 68 million, PGH1 released the with-profit fundsfrom any future obligations to indemnify the company.
On the same date, the PGL Pension Scheme entered into a longevity swap with PLL with effect from 1 January 2014, under which the Scheme has transferred the risk of longevity improvements in respect of its in-payment members to PLL.
12. Liabilities under insurance contracts - assumptions
12.1 Valuation of participating insurance and investment contracts
For participating business, which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.
12.2 Valuation of non-participating insurance contracts
The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.
12.3 Process used to determine assumptions
For participating business in realistic basis companies the assumptions about future demographic trends are intended tobe 'best estimates'. They are determined after considering the companies' recent experience and/or relevant industry data. Economic assumptions are market consistent.
For other business, demographic assumptions are derived by adding a prudent margin to best estimate assumptions. Economic assumptions are prudent estimates of the returns expected to be achieved on the assets backing the liabilities.
During the period, persistency assumptions have been updated to reflect the anticipated impact of pensions reforms announced in the March Budget, which is expected to reduce the cost of meeting valuable policyholder guarantees. This change reduced insurance liabilities by 12 million in the period.
In the prior period, longevity improvement assumptions were updated to reflect latest available published tables, reducing insurance liabilities by 12 million.
Decrease in insurance liabilities
30 Jun 2014
m
Decrease in insurance liabilities
30 Jun 2013
m
(Decrease)/ increase in insurance liabilities
31 Dec 2013
m
Change in longevity assumptions
-
(12)
(6)
Change in persistency assumptions
(12)
-
6
Change in expense assumptions
-
-
(7)
13. Borrowings
30 Jun 2014
m
30 Jun 2013
m
31 Dec 2013
m
Carrying value



Limited recourse bonds 2022 7.59% 
88
95
86
Property reversions loan 
185
192
186
80 million facility agreement
80
80
80
150 million term facility
150
148
150
Total policyholder borrowings
503
515
502
200 million 7.25% unsecured subordinated loan
155
147
151
2,260 million syndicated loan
1,122
1,342
1,182
100 million PIK notes and facility
124
119
121
75 million secured loan note
77
76
76
425 million loan facility
304
328
327
Total shareholder borrowings
1,782
2,012
1,857
Total borrowings
2,285
2,527
2,359
On 30 June 2014, a scheduled repayment of 30 million was made in respect of the 2,260 million syndicated loan ('Impala facility') in addition to a targeted repayment of 30 million made on 30 April 2014.
On 30 June 2014, a scheduled repayment of 23 million was made on the 425 million loan facility ('Pearl facility').
A number of repayments have been made since the end of the reporting period as set out below.
On 1 July 2014 a 250 million debt prepayment was made in respect of the 2,260 million syndicated loan following the divestment of Ignis Asset Management to Standard Life Investments.
On 7 July 2014 the Group's new financing subsidiary, PGH Capital Limited, issued a 300 million 7 year senior unsecured bond at an annual coupon rate of 5.75%. The net proceeds from the bond issue of 296 million were used to prepay the Impala facility.
On 23 July 2014 PGH Capital Limited entered into a new 900 million five year unsecured bank facility to refinance the Group's existing bank facilities and PIK notes with a single debt facility. A further 206 million debt prepayment was made on draw down of this facility. The new facility, together with the 206 million debt prepayment has fully refinanced the Impala facility, the 100 million PIK notes and facility, the 75million secured loan note and the 425 million loan facility. Further details of the new 900 million debt facility are included in note 18. 
14. Financial instruments
14.1 Fair values
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 30 June 2014:
Financial assets

30 Jun 2014
30 Jun 2013 Restated
31 Dec 2013 Restated

Carrying
value
m
Fair
value
m
Carrying
value
m
Fair
value
m
Carrying
value
m
Fair
value
m
Loans and receivables at amortised cost
1,560
1,568

2,271
2,274

1,977
1,985
Financial assets at fair value through profit or loss:








Held for trading - derivatives
1,349
1,349

2,674
2,674

1,966
1,966
Designated upon initial recognition:








Equities
13,869
13,869

13,539
13,539

13,913
13,913
Investment in joint ventures
118
118

104
104

125
125
Fixed and variable rate income securities
35,643
35,643

38,580
38,580

35,510
35,510
Collective investment schemes
2,475
2,475

4,092
4,092

3,772
3,772

55,014
55,022

61,260
61,263

57,263
57,271
Less amounts classified as held for sale (note 3.2)
(37)
(37)

(55)
(55)

(55)
(55)

54,977
54,985

61,205
61,208

57,208
57,216
Financial liabilities

30 Jun 2014
30 Jun 2013 Restated
31 Dec 2013 Restated

Carrying
value
m
Fair
value
m

Carrying
value
m
Fair
value
m
Carrying
value
m
Fair
value
m
Financial liabilities at fair value through profit or loss: 








Held for trading - derivatives
1,616
1,616

2,783
2,783

2,161
2,161
Designated upon initial recognition:








Borrowings
185
185

192
192

186
186
Net asset value attributable to unitholders
5,431
5,431

5,767
5,767

5,744
5,744
Investment contract liabilities 
8,508
8,508

8,327
8,327

8,578
8,578









Financial liabilities measured at amortised cost:








Borrowings
2,100
2,147

2,335
2,270

2,173
2,194
Obligations for repayment of collateral received
5,324
-

9,344
-

7,284
-
Deposits received from reinsurers
384
384

412
412

385
385

23,548
18,271

29,160
19,751

26,511
19,248
14.2 Fair value hierarchy
14.2.1 Determination of fair value and fair value hierarchy of financial instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicates a higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. The fair value of unquoted equities, over-the-counter derivatives, loans and deposits and collective investment schemes, where published bid prices are not available, are estimated using pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument.
Level 3 financial instruments
The Group's financial instruments determined by valuation techniques using non-observable market inputs are based on a combination ofindependent 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 thefund, 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 small number of investment vehicles and debt securities, standard valuation models are used, asdue 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 and some borrowings with no external market is determined by internally developed discounted cash flowmodels using a risk adjusted discount rate corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Company 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) at the start of each reporting period.
14.2.2 Fair value hierarchy of financial instruments measured at fair value
At 30 June 2014
Level 1
m
Level 2
m
Level 3
m
Total
fair value
m
Financial assets at fair value




Derivatives
14
1,335
-
1,349
Financial assets designated at fair value through profit orlossuponinitialrecognition:




Equities
13,107
148
614
13,869
Fixed and variable rate income securities
25,119
9,586
938
35,643
Investment in joint ventures
-
-
118
118
Collective investment schemes
1,413
947
115
2,475

39,639
10,681
1,785
52,105
Less amounts classified as held for sale (note 3.2)
(1)
(36)
-
(37)
Total financial assets at fair value
39,652
11,980
1,785
53,417
Level 1
m
Level 2
m
Level 3
m
Total
fair value
m
Financial liabilities at fair value




Derivatives
6
1,605
5
1,616
Financial liabilities designated at fair value through profit orlossuponinitialrecognition:




Investment contract liabilities
-
8,508
-
8,508
Borrowings
-
-
185
185
Net asset value attributable to unitholders
5,431
-
-
5,431

5,431
8,508
185
14,124
Total financial liabilities at fair value
5,437
10,113
190
15,740
At 30 June 2013

Level 1
Restated
m
Level 2
Restated
m
Level 3
Restated
m
Total
fair value
Restated
m
Financial assets at fair value




Derivatives
27
2,643
4
2,674
Financial assets designated at fair value through profit
or loss upon initial recognition:




Equities
12,599
143
797
13,539
Investment in joint ventures
-
-
104
104
Fixed and variable rate income securities
28,559
9,621
400
38,580
Collective investment schemes
2,864
1,055
173
4,092

44,022
10,819
1,474
56,315
Less amounts classified as held for sale (note 3.2)
(55)
-
-
(55)
Total financial assets at fair value
43,994
13,462
1,478
58,934

Level 1
Restated
m
Level 2
Restated
m
Level 3
m
Total
fair value
Restated
m
Financial liabilities at fair value




Derivatives
13
2,770
-
2,783
Financial liabilities designated at fair value through profit
or loss upon initial recognition:




Investment contract liabilities
-
8,327
-
8,327
Borrowings
-
192
-
192
Net asset value attributable to unitholders
5,729
-
38
5,767

5,729
8,519
38
14,286
Total financial liabilities at fair value
5,742
11,289
38
17,069
At 31 December 2013

Level 1
Restated
m
Level 2
Restated
m
Level 3
Restated
m
Total
fair value
Restated
m
Financial assets at fair value




Derivatives
49
1,917
-
1,966
Financial assets designated at fair value through profit
or loss upon initial recognition:




Equities
13,136
149
628
13,913
Investment in joint ventures
-
-
125
125
Fixed and variable rate income securities
25,494
9,081
935
35,510
Collective investment schemes
2,591
1,065
116
3,772

41,221
10,295
1,804
53,320
Less amounts classified as held for sale (note 3.2)
(55)
-
-
(55)
Total financial assets at fair value
41,215
12,212
1,804
55,231
At 31 December 2013

Level 1
Restated
m
Level 2
Restated
m
Level 3
Restated
m
Total
fair value
Restated
m
Financial liabilities at fair value




Derivatives
40
2,118
3
2,161
Financial liabilities designated at fair value through profit
or loss upon initial recognition:




Investment contract liabilities
-
8,578
-
8,578
Borrowings
-
-
186
186
Net asset value attributable to unitholders
5,744
-
-
5,744

5,744
8,578
186
14,508
Total financial liabilities at fair value
5,784
10,696
189
16,669
14.2.3 Level 3 financial instrument sensitivities
Included in Level 3 investments are two property investment structures with a value of 29 million within fixed and variable rate income securities (30 June 2013 Restated: 18 million; 31 December 2013 Restated: 15 million) and 118 million within investment in joint ventures (30 June 2013 Restated: 104 million; 31 December 2013 Restated: 125 million).
Both investments have been valued by taking the fair value of the property within the structures, which have been independently valued, less the fair value of the debt within the structures. The valuations are sensitive to movements in yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the first investment by 8 million (30 June 2013: 9 million; 31 December 2013: 8 million) and the second investment by 21 million (30 June 2013: 22 million; 31 December 2013: 23 million). A reduction in yields of 25bps would increase the value of the first investments by 9 million (30 June 2013: 10 million; 31 December 2013: 9 million) and the second investment by 25 million (30 June 2013: 25 million; 31 December 2013: 25 million).
Level 3 investments in indirect property, equities (including private equity) and collective investment schemes (including hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.
Debt securities categorised as Level 3 investments are valued using broker quotes. Although such valuations are sensitive to estimates, itisbelieved that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair valuesignificantly.
Borrowings measured at fair value and categorised as Level 3 financial liabilities comprise the property reversion loans, measured using an internally developed model. The valuation is sensitive to increases (decreases) in the fair value of relevant residential property reversions which would result in a higher (lower) fair value of property reversion loans. Details of the valuation of the underlying residential property reversions are included in note 13.
14.2.4 Transfers of financial instruments between Level 1 and Level 2
30 June 2014

From
Level 1 to
Level 2
m
From
Level 2 to
Level 1
m
Financial assets at fair value


Financial assets designated at fair value through profit or loss upon initial recognition:


Fixed and variable rate income securities
86
539
Collective investment schemes
2
-
30 June 2013

From
Level 1 to
Level 2
m
From
Level 2 to
Level 1
m
Financial assets at fair value


Financial assets designated at fair value through profit or loss upon initial recognition:


Fixed and variable rate income securities
241
528
Collective investment schemes
210
-
31 December 2013

From
Level 1 to
Level 2
Restated
m
From
Level 2 to
Level 1
Restated
m
Financial assets at fair value


Financial assets designated at fair value through profit or loss upon initial recognition:


Derivatives
-
5
Fixed and variable rate income securities
724
238
Collective investment schemes
243
-
Financial liabilities at fair value


Derivatives
-
20
Consistent with the prior year, all the Group's Level 1 and Level 2 assets have been valued using standard market pricing sources.
The application of the Group's fair value hierarchy classification methodology at an individual security level in particular observations with regard to measures of market depth and bid-ask spreads, have resulted in an overall net movement of financial assets from Level 2 to Level1 in the period.
14.2.5 Movement in Level 3 financial instruments measured at fair value
30 June 2014
At 1January 2014
m
Total gains/
(losses) in income statement
m
Purchases
m
Sales
m
Transfers from
Level 1 and
Level 2
m
Transfers to
Level 1 and
Level 2
m
At 30 June
2014
m
Unrealised gains on assets held at end of period
m
Financial assets








Financial assets designated at fair value through profit or loss upon initial recognition:








Equities
628
18
28
(61)
1
-
614
9
Investment in joint ventures
125
(7)
-
-
-
-
118
-
Fixed and variable rate income securities
935
29
193
(202)
34
(51)
938 
25
Collective investment schemes
116
8
-
(16)
7
-
115
6
Total financial assets
1,804
48
221
(279)
42
(51)
1,785 
40
30 June 2014
At 1 January 2014
m
Total losses in income statement
m
Purchases
m
Sales
m
Transfers from
Level 1 and
Level 2
m
Transfers to
Level 1 and
Level 2
m
At 30 June
2014
m
Unrealised gains on liabilities held at end of period
m
Financial liabilities








Derivatives 
3
2
-
-
-
-
5
(1)
Financial liabilities designated at fair value through profit or loss upon initial recognition:








Borrowings
186
14
-
(15)
-
-
185
(1)
Total financial liabilities
189
16
-
(15)
-
-
190
(2)
During the period, updates to the Group's observations with regard to the extent to which inputs to the valuation of fixed and variable rate income securities are market observable resulted in a net transfer from Level 3 to Levels 1 and 2.
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income.
30 June 2013
At 1 January 2013
Restated
m
Total (losses)/gains in income statement
Restated
m
Purchases
Restated
m
Sales
Restated
m
Transfers from
Level 1 and
Level 2
Restated
m
Transfers to
Level 1 and
Level 2
Restated
m
At 30 June
2013
Restated
m
Unrealised (losses)/gains on assets held at end of period
Restated
m
Financial assets








Derivatives
12
(7)
- 
(1)
-
-
4
(8)
Financial assets designated at fair value through profit or loss upon initial recognition:








Equities
715
23
53
(30)
41
(5)
797
47
Investment in joint ventures
95
9
-
-
-
-
104
-
Fixed and variable rate income securities
500
27
12
(115)
13
(37)
400
23
Collective investment schemes
158
17
17
(36)
17
-
173
15

1,468
76
82
(181)
71
(42)
1,474
85
Total financial assets
1,480
69
82
(182)
71
(42)
1,478
77
30 June 2013
At 1 January 2013
m
Total (gains)/losses in income statement
m
Purchases
m
Sales
m
Transfers from
Level 1 and
Level 2
m
Transfers to
Level 1 and
Level 2
m
At 30 June
2013
m
Unrealised losses on liabilities held at end of period
m
Financial liabilities








Derivatives
3
(3)
-
-
-
-
-
-
Financial liabilities designated at fair value through profit or loss upon initial recognition:








Net asset value attributable to unitholders
70
6
- 
(38)
-
-
38
6
Total financial liabilities
73
3
- 
(38)
-
-
38
6
31 December 2013
At 1 January 2013
Restated
m
Total
(losses)/gains
in income statement
Restated
m
Purchases
m
Sales
Restated
m
Transfers from Level 1 and
Level 2
m
Transfers to
Level 1 and
Level 2
m
At
31 December 2013
Restated
m
Unrealised
(losses)/gains on assets
held at end
of period
Restated
m
Financial assets








Derivatives
12
(12)
-
-
-
-
-
(12)
Financial assets designated at fair value through profit or loss upon initial recognition:








Equities
715
(45)
50
(131)
39
-
628
2
Investment in joint ventures
95
30
-
-
-
-
125
-
Fixed and variable rate income securities
500
104
827
(862)
390
(24)
935
70
Collective investment schemes
158
10
1
(40)
1
(14)
116
10

1,468
99
878
(1,033)
430
(38)
1,804
82
Total financial assets
1,480
87
878
(1,033)
430
(38)
1,804
70
At 1 January 2013
m
Total losses
in income statement
Restated
m
Purchases
Restated
m
Sales
Restated
m
Transfers from Level 1 and
Level 2
m
Transfers to
Level 1 and
Level 2
m
At
31 December 2013
Restated
m
Unrealised
(gains)/losses on liabilities
held at end
of period
m
Financial liabilities








Derivatives
3
4
-
(4)
-
-
3
(8)
Financial liabilities designated at fair value through profit or loss upon initial recognition:








Borrowings
-
14
-
(22)
194
-
186
(15)
Net asset value attributable to unitholders
70
--
--
(70)
-
-
--
--

70
14
--
(92)
194
-
186
(15)
Total financial liabilities
73
18
--
(96)
194
-
189
(23)
15. Cash flows from operating activities
Half year ended
30 Jun 2014
m
Half year ended
30 Jun 2013
Restated
m
Year ended
31 Dec 2013
Restated
m
Profit/(loss) for the period before tax from continuing operations
290
(13)
241
Loss for the period before tax from discontinued operations (note 3.1)
(27)
(28)
(51)
Profit/(loss) for the period before tax
263
(41)
190
Non-cash movements in profit/(loss) for the period before tax



Fair value (gains)/losses on:



Investment property
(120)
10
(72)
Financial assets
(670)
285
(299)
Change in fair value of borrowings
20
24
36
Depreciation of property, plant and equipment
-
2
3
Amortisation of intangible assets
60
67
130
Change in present value of future profits
8
(6)
(9)
Change in unallocated surplus
19
38
77
Share-based payment charge
-
3
6
Interest expense on borrowings
82
129
230
Net interest (income)/expense on Group defined benefit pension scheme asset/liability
(6)
(1)
1
Other losses on pension schemes
-
-
12
Gain on transfer of business
(4)
-
(42)
Decrease in investment assets
2,073
2,854
6,913
(Increase)/decrease in reinsurance assets
(4)
481
349
Decrease in insurance contract and investment contract liabilities
(133)
(1,890)
(2,519)
Decrease in deposits received from reinsurers
(1)
(42)
(69)
Decrease in obligation for repayment of collateral received
(1,961)
(1,114)
(3,174)
Net increase in working capital
64
(34)
(740)
Cash (utilised)/generated by operations
(310)
765
1,023
Cash flows from operating activities generated by discontinued operations are disclosed in note 3.1.
16. 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 2013.
During the period, the PGL Pension Scheme entered into a longevity swap with PLL with effect from 1 January 2014, under which theScheme has transferred the risk of longevity improvements in respect of its in-payment members to PLL. This transaction has been eliminated upon consolidation and therefore has had no impact on the interim financial statements.
There were no other transactions with related parties during the six months ended 30 June 2014, which have had a material effect on theresults or financial position of the Group.
17. Contingent liabilities
In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration. At the period end, theGroup has a number of contingent liabilities in this regard, none of which are considered by the directors to be material.
18. Events after the reporting period
On 1 July 2014 the Group completed the divestment of Ignis Asset Management to Standard Life Investments and gross cash consideration of 390 million was received. 250 million of these proceeds were used to prepay the Impala loan facility.
On 7 July 2014 the Group's new financing subsidiary, PGH Capital Limited, issued a 300 million 7 year senior unsecured bond at an annualcoupon rate of 5.75%. The net proceeds from the bond issue of 296 million were used to prepay the Impala loan facility.
On 23 July 2014 PGH Capital Limited entered into a new 900 million 5 year unsecured bank facility which along with a 206 million debt prepayment from internal resources was used to refinance the entirety of the Group's existing two bank facilities and PIK notes, replacing the Pearl and Impala loan facilities with a single debt facility.
The new facility comprises a 450 million revolving credit facility ('RCF') loan and a 450 million amortising term loan. Both loans are repayable by July 2019 with an option to request an extension to the term of the RCF loan by two years to July 2021. Further terms of thefacilities agreement include:
 Term facility repayment instalments of 30 million are due semi-annually on 30 June and 31 December each year. Additional target repayments of 30 million may be paid semi-annually on 30 June and 31 December each year from 30 June 2015, non-payment of whichwould trigger restrictions on the Group regarding the declaration of dividends;
 The term loan bears interest at LIBOR plus an opening margin of 3.50% p.a. and the RCF loan at LIBOR plus an opening margin of 3.25% p.a.. After six months the margins will change in accordance with a margin ratchet which operates by reference to the Group's gearing ratio. Margins will reduce by 0.50% on achievement of an investment grade rating.
 Amongst other fees, a utilisation fee of 0.25% p.a. is payable in respect of the RCF loan for so long as the amount outstanding under the RCF exceeds 50% of the total commitments of the RCF loan.
On 31 July 2014 the Group entered into a reinsurance agreement, effective 1 January 2014, to transfer approximately 1.7 billion of annuity in-payment liabilities, currently held within the Group's with-profit funds, to Guardian Assurance Limited ('Guardian'). On 11 August 2014 theGroup made an associated transfer of 1.7 billion of assets to Guardian as the related reinsurance premium for the transferred annuityliabilities.
On 20 August 2014, the Board declared an interim dividend per share of 26.7p for the half year ended 30 June 2014 (30 June 2013: 26.7p). The cost of this dividend has not been recognised as a liability in the interim financial statements for the period to 30 June 2014 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 including stock lending collateral. It excludes other Group assets such as cash held in the holding and service companies and Ignis; the assets held by the noncontrolling interest in collective investment schemes and UKCPT and is net of derivative liabilities.
The following table provides an overview of the exposure by asset category of the Group's life companies' shareholder and policyholderfunds:
30 June 2014
Carrying value
Shareholder
and non-profit
funds1
m
Participating1
supported
m
Participating2
non-supported
m
Unit-linked2
m
Total3
m
Cash and cash equivalents1
1,734
754
5,521
1,033
9,042
Debt securities - gilts
1,203
2,108
8,089
647
12,047
Debt securities - bonds
6,098
1,828
8,711
774
17,411
Equity securities
334
64
6,015
8,041
14,454
Property investments
151
81
1,002
344
1,578
Other investments4
328
(59)
1,704
1
1,974
As at 30 June 2014
9,848
4,776
31,042
10,840
56,506
Collective investment schemes




5,477
UKCPT




667
Cash held in other Group entities




1,086
Total Group consolidated assets




63,736
Comprised of:





Investment property




1,683
Financial assets




54,977
Cash and cash equivalents




8,692
Derivative liabilities




(1,616)





63,736
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 This information is presented on a look through basis to underlying funds where available.
4 Includes repurchase loans of 1,404 million, policy loans of 29 million, other loans of 12 million, net derivatives liabilities of 186 million and other investments of 715 million.
31 December 2013 Restated
Carrying value
Shareholder
and non-profit
funds1
m
Participating1
supported
m
Participating2
non-supported
m
Unit-linked2
m
Total3
m
Cash and cash equivalents
1,439
849
6,221
994
9,503
Debt securities - gilts
1,216
2,132
8,442
486
12,276
Debt securities - bonds
5,974
1,889
9,223
1,009
18,095
Equity securities
380
28
6,104
8,260
14,772
Property investments
199
80
876
286
1,441
Other investments5
292
(88)
2,204
58
2,466
As at 31 December 2013
9,500
4,890
33,070
11,093
58,553





Total3
Restated
m
Collective investment schemes




5,717
UKCPT




584
Cash held in other Group entities




1,085
General insurance business




9
Corporate derivative liabilities




(5)
Adjustments on consolidation




1
Total Group consolidated assets




65,944
Comprised of:





Investment property




1,603
Financial assets




57,208
Cash and cash equivalents




9,294
Derivative liabilities




(2,161)





65,944
5 Includes repurchase loans of 1,789 million, policy loans of 13 million, other loans of 67 million, net derivatives of 211 million and other investments of 807 million.
The following table analyses by type the debt securities of the life companies:
30 June 2014
Analysis by type of debt securities
Shareholder and non-profit funds
m
Participating
supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
Gilts
1,203
2,108
8,089
647
12,047
Other government and supranational6
1,099
709
2,552
110
4,470
Corporate - financial institutions
2,084
474
3,111
173
5,842
Corporate - other
2,344
304
2,191
430
5,269
Asset backed securities ('ABS')
571
341
857
61
1,830
As at 30 June 2014
7,301
3,936
16,800
1,421
29,458
6 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.
31 December 2013
Analysis by type of debt securities
Shareholder and non-profit funds
m
Participating
supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
Gilts
1,216
2,132
8,442
486
12,276
Other government and supranational6
1,061
678
2,517
290
4,546
Corporate - financial institutions
2,051
513
3,417
216
6,197
Corporate - other
2,285
349
2,238
439
5,311
Asset backed securities ('ABS')
577
349
1,051
64
2,041
As at 31 December 2013
7,190
4,021
17,665
1,495
30,371
The following table sets out a breakdown of the life companies' sovereign and supranational debt security holdings by country:
30 June 2014
Analysis of sovereign and supranational debt security holdings by country
Shareholder and non-profit funds
m
Participating
supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,321
2,177
8,525
661
12,684
European Investment Bank 
524
324
709
27
1,584
USA
3
6
58
11
78
Germany
380
230
868
28
1,506
France
44
55
56
-
155
Netherlands
-
1
-
-
1
Portugal 
-
-
-
-
-
Italy
-
-
-
2
2
Ireland
-
-
-
-
-
Greece
-
-
-
-
-
Spain
-
5
-
2
7
Other - non-Eurozone
16
10
333
23
382
Other - Eurozone
14
9
92
3
118
As at 30 June 2014
2,302
2,817
10,641
757
16,517
31 December 2013
Analysis of sovereign and supranational debt security holdings by country
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,326
2,207
8,831
671
13,035
European Investment Bank 
507
324
669
37
1,537
USA
3
16
42
11
72
Germany
406
243
1,010
23
1,682
France
4
-
6
1
11
Netherlands
7
-
22
1
30
Portugal 
-
-
-
-
-
Italy
-
-
-
3
3
Ireland
-
-
-
-
-
Greece
-
-
-
-
-
Spain
-
4
-
2
6
Other - non-Eurozone
13
7
305
24
349
Other - Eurozone
11
9
74
3
97
As at 31 December 2013
2,277
2,810
10,959
776
16,822
The following table sets out a breakdown of the life companies' financial institution corporate debt security holdings by country:
30 June 2014
Analysis of financial institution corporate debt security holdings by country
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,085
278
1,231
79
2,673
USA
380
77
536
13
1,006
Germany
66
6
83
3
158
France
131
14
243
12
400
Netherlands
217
57
517
39
830
Portugal 
-
-
-
-
-
Italy
1
-
17
-
18
Ireland
-
-
-
-
-
Greece
-
-
-
-
-
Spain
2
-
27
-
29
Other - non-Eurozone
156
36
404
28
624
Other - Eurozone
46
6
53
(1)
104
As at 30 June 2014
2,084
474
3,111
173
5,842
31 December 2013
Analysis of financial institution corporate debt security holdings by country
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,062
291
1,323
91
2,767
USA
357
69
440
15
881
Germany
120
32
296
25
473
France
80
5
184
19
288
Netherlands
187
57
518
36
798
Portugal 
-
-
-
-
-
Italy
29
-
13
-
42
Ireland
1
-
1
-
2
Greece
-
-
-
-
-
Spain
2
-
9
-
11
Other - non-Eurozone
141
45
457
26
669
Other - Eurozone
72
14
176
4
266
As at 31 December 2013
2,051
513
3,417
216
6,197
The following table sets out a breakdown of the life companies' corporate - other debt security holdings by country:
30 June 2014
Analysis of corporate - other debt security holdings by country
Shareholder and non-profit funds
m
Participating
supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,196
144
1,145
345
2,830
USA
350
67
276
14
707
Germany
212
39
190
15
456
France
188
28
205
19
440
Netherlands
59
4
43
3
109
Portugal 
-
-
-
-
-
Italy
60
1
80
4
145
Ireland
1
-
5
-
6
Greece
2
-
-
-
2
Spain
26
-
39
1
66
Other - non-Eurozone
149
18
124
16
307
Other - Eurozone
101
3
84
13
201
As at 30 June 2014
2,344
304
2,191
430
5,269
31 December 2013
Analysis of corporate - other debt security holdings by country
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
1,169
141
1,156
335
2,801
USA
299
67
240
16
622
Germany
201
46
259
24
530
France
191
73
204
14
482
Netherlands
61
-
40
2
103
Portugal 
-
-
-
-
-
Italy
61
1
70
7
139
Ireland
10
-
1
-
11
Greece
2
-
-
-
2
Spain
26
-
30
3
59
Other - non-Eurozone
168
18
145
20
351
Other - Eurozone
97
3
93
18
211
As at 31 December 2013
2,285
349
2,238
439
5,311
The following table sets out a breakdown of the life companies' ABS holdings by country:
30 June 2014
Analysis of ABS holdings by country
Shareholder and non-profit
funds
m
Participating
supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
489
333
688
58
1,568
USA
38
-
7
-
45
Germany
1
-
46
-
47
France
-
1
-
-
1
Netherlands
22
-
33
2
57
Portugal 
-
-
-
-
-
Italy
-
-
13
-
13
Ireland
-
-
43
-
43
Greece
-
-
-
-
-
Spain
-
-
3
-
3
Other - non-Eurozone
20
2
17
1
40
Other - Eurozone
1
5
7
-
13
As at 30 June 2014
571
341
857
61
1,830
31 December 2013
Analysis of ABS holdings by country
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
UK
478
329
818
59
1,684
USA
41
-
11
-
52
Germany
2
5
104
-
111
France
2
2
8
-
12
Netherlands
22
2
51
5
80
Portugal 
-
-
-
-
-
Italy
-
1
16
-
17
Ireland
14
2
22
-
38
Greece
-
-
-
-
-
Spain
-
-
4
-
4
Other - non-Eurozone
17
2
17
-
36
Other - Eurozone
1
6
-
-
7
As at 31 December 2013
577
349
1,051
64
2,041
The following table sets out the credit rating analysis of the debt portfolio:
30 June 2014
Credit rating analysis of debt portfolio
Shareholder and non-profit funds
m
Participating supported
m
Participating non-supported
m
Unit-linked
m
Total
m
AAA
1,182
766
2,306
99
4,353
AA
1,703
2,486
9,262
728
14,179
A
1,559
475
1,905
106
4,045
BBB
1,952
161
2,486
189
4,788
BB
368
8
269
11
656
B and below
354
-
23
6
383
Non-rated
183
40
549
282
1,054
As at 30 June 2014
7,301
3,936
16,800
1,421
29,458
31 December 2013
Credit rating analysis of debt portfolio
Shareholder and non-profit funds
m
Participating supported
m
Participating
non-supported
m
Unit-linked
m
Total
m
AAA
1,096
674
2,183
89
4,042
AA
1,783
2,640
10,121
553
15,097
A
1,498
502
2,155
163
4,318
BBB
1,883
174
2,469
212
4,738
BB
218
7
249
20
494
B and below
353
1
31
5
390
Non-rated
359
23
457
453
1,292
As at 31 December 2013
7,190
4,021
17,665
1,495
30,371
MCEV SUPPLEMENTARY INFORMATION
Statement of directors' responsibilities
64
Auditor's review report
65
MCEV interim financial statements and notes
66
statement of Directors' responsibilities in respect ofthe Market Consistent Embedded Value ('MCEV')
When compliance with the CFO Forum MCEV principles published in June 2008 and amended in October 2009 is stated those principles require theDirectors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any non-compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exceptionof:
 risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus10 basis points rather than as the swap rate curve;
 the value of asset management and the management service companies has been included on an IFRS basis; and
 no allowance for the costs of residual non-hedgeable risk has been made.
Further detail on these exceptions is included in note 1, Basis of preparation.
Specifically, the Directors have:
 determined assumptions on a realistic basis, having regard to past, current and expected future experience andtorelevant external data, and then applied them consistently;
 made estimates that are reasonable and consistent; and
 provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to enable users to understand the impact of particular transactions, other events and conditions and the Group's financial position and financial performance.
CLIVE BANNISTER  JAMES McCONVILLE
Group Chief Executive Group Finance Director
St Helier, Jersey
20 August 2014
auditor's review report
Independent review report to the Directors of Phoenix Group Holdings on the Consolidated Phoenix Group Market Consistent Embedded Value('MCEV')
We have been engaged by the Company to review the Consolidated Phoenix Group Holdings MCEV ('Phoenix Group Holdings MCEV') in the interim report for the half year ended 30 June 2014 which comprises the Summarised consolidated income statement - Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income - Group MCEV basis, Reconciliation of movement in equity - Group MCEV basis, Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to MCEV net worth and the related notes on pages 71 to 80. Wehave read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Phoenix Group Holdings MCEV.
Ernst & Young LLP have reported separately on the condensed consolidated financial statements of Phoenix Group Holdings prepared on an IFRS basis for the half year ended 30 June 2014. The information contained in the Phoenix Group Holdings MCEV should be read in conjunction with the condensed consolidated financial statements prepared onanIFRS basis.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's Directors, for our work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The Phoenix Group Holdings MCEV in the interim report is the responsibility of, and has been approved by, the Directors. TheDirectors are responsible for preparing the Phoenix Group MCEV in accordance with the basis of preparation set out on pages 71 to 75.
Our responsibility
Our responsibilities for the Phoenix Group Holdings MCEV are set out in our engagement letter with you dated 1 August 2014. We report to you our opinion as to whether the Phoenix Group Holdings MCEV in the interim report has been properly prepared, in all material respects, in accordance with the Basis of preparation set out on pages 71 to 75.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410. Areview 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 Ireland) 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.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Phoenix Group Holdings MCEV inthe interim report for the half year ended 30 June 2014 has not been prepared, in all material respects, in accordance with the basis of preparation set out on pages 71 to 75.
Ernst & Young LLP
London
20 August 2014
mCEV interim financial statements and notes
Summarised consolidated income statement - Group MCEV basis
For the half year ended 30 June 2014

Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Year ended
31 December
2013
m
Life MCEV operating earnings
181
165
401
Management services operating profit
16
18
32
Ignis Asset Management operating profit - discontinued operations
17
19
49
Group costs
(10)
(13)
(27)
Group MCEV operating earnings before tax
204
189
455
Economic variances on life business
(28)
(30)
138
Economic variances on non-life business
(37)
(43)
(48)
Other non-operating variances on life business
(132)
(3)
(35)
Non-recurring items on non-life business
59
(38)
(61)
Finance costs attributable to owners
(62)
(84)
(140)
Group MCEV earnings before tax
4
(9)
309
Tax on operating earnings
(42)
(44)
(105)
Tax on non-operating earnings
20
9
(42)
Total tax
(22)
(35)
(147)
Group MCEV earnings after tax
(18)
(44)
162



Analysed between:

Group MCEV earnings after tax from continuing operations
-
(23)
204
Group MCEV earnings after tax from discontinued operations
(18)
(21)
(42)
Group MCEV earnings after tax
(18)
(44)
162



MCEV earnings per ordinary share
For the half year ended 30 June 2014

Half year ended
30 June 2014
Half year ended
30 June 2013
Year ended
31 December
2013
Group MCEV operating earnings per share after tax



Basic1
72.3p
69.1p
165.5p
Diluted2
72.2p
69.1p
165.3p
Group MCEV earnings per share after tax



Basic1
(8.0p)
(20.9p)
76.2p
Diluted2
(8.0p)
(20.9p)
76.1p




1 Based on 225 million shares (half year ended 30 June 2013: 209 million; year ended 31 December 2013: 212 million) as set out in note 7.1 of the IFRS condensed consolidated interim financial statements.
2 Based on 225 million shares (half year ended 30 June 2013: 209 million; year ended 31 December 2013: 212 million), allowing for share options in issue as set out in note 7.2 ofthe IFRS condensed consolidated interim financial statements.
The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate ofshareholder taxfor presentation in the income statement. The tax rate used is the average UK corporate tax rate of 21.5% (half year ended 30 June 2013: 23.25%; year ended 31 December 2013: 23.25%).
Statement of consolidated comprehensive income - GroupMCEVbasis
For the half year ended 30 June 2014

Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Year ended
31 December
2013
m
Group MCEV earnings after tax
(18)
(44)
162
Other comprehensive income



Actuarial gains/(losses) and pension scheme contributions
 on defined benefit pension schemes (net of tax)
32
(2)
(16)
Total comprehensive income
14
(46)
146



Reconciliation of movement in equity - Group MCEV basis
For the half year ended 30 June 2014

Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Year ended
31 December
2013
m
Opening Group MCEV equity
2,378
2,122
2,122
Total comprehensive income for the period
14
(46)
146
Movement in equity for equity-settled share-based payments
3
3
6
Dividends paid on ordinary shares
(60)
(60)
(120)
Issue of ordinary share capital, net of associated commissions and expenses
-
233
233
Dividends paid on shares held by the employee benefit trust and Group entities
1
1
2
Shares acquired by employee benefit trust
(8)
(6)
(11)
Total capital and dividend flows - external
(64)
171
110
Closing Group MCEV equity
2,328
2,247
2,378
Group MCEV analysis of earnings
For the half year ended 30 June 2014
Non-covered business
Covered
business
MCEV
m
Management
services
IFRS
m
Asset
Management1
IFRS
m
Other Group
companies2
IFRS
m
Group
MCEV
m
Group MCEV at 1January2014
3,059
134
108
(923)
2,378
Operating MCEV earnings (after tax)
142
13
14
(7)
162
Non-operating MCEV earnings (after tax)
(126)
(6)
(2)
(46)
(180)
Total MCEV earnings
16
7
12
(53)
(18)
Other comprehensive income
-
-
-
32
32
Capital and dividend flows - internal
(242)
2
(29)
269
-
Capital and dividend flows - external
-
-
-
(64)
(64)
Closing value at 30 June 2014
2,833
143
91
(739)
2,328





1 Relates to the Ignis Asset Management division disposed of on 1 July 2014 (see note 1), classified as discontinued operations. The Asset Management MCEV earnings after tax of 12 million includes intragroup fee income after tax of 30 million.
2 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.
For the half year ended 30 June 2013
Non-covered business
Covered
business
MCEV
m
Management
services
IFRS
m
Asset
Management
IFRS
m
Other Group
companies
IFRS
m
Group
MCEV
m
Group MCEV at 1January2013
3,263
115
86
(1,342)
2,122
Operating MCEV earnings (after tax)
127
14
15
(11)
145
Non-operating MCEV earnings (after tax)
(25)
(4)
(3)
(157)
(189)
Total MCEV earnings
102
10
12
(168)
(44)
Other comprehensive income
-
-
-
(2)
(2)
Capital and dividend flows - internal 
(422)
1
-
421
-
Capital and dividend flows - external
-
-
-
171
171
Closing value at 30 June 2013
2,943
126
98
(920)
2,247




For the year ended 31 December 2013
Non-covered business
Covered
business
MCEV
m
Management
services
IFRS
m
Asset
Management
IFRS
m
Other Group
companies
IFRS
m
Group
MCEV
m
Group MCEV at 1January2013
3,263
115
86
(1,342)
2,122
Operating MCEV earnings (after tax)
308
25
38
(21)
350
Non-operating MCEV earnings (after tax)
79
(8)
(2)
(257)
(188)
Total MCEV earnings
387
17
36
(278)
162
Other comprehensive income
-
-
-
(16)
(16)
Capital and dividend flows - internal 
(591)
2
(14)
603
-
Capital and dividend flows - external
-
-
-
110
110
Closing value at 31December 2013
3,059
134
108
(923)
2,378





Reconciliation of Group IFRS equity to MCEV networth
30 June 2014
m
30 June 2013
m
31 December
2013
m
Group net assets attributable to owners of the parent asreportedunderIFRS
2,060
1,806
1,909
Goodwill and other intangibles in accordance with IFRS removed (netoftax)
(383)
(411)
(391)
Value of in-force business in accordance with IFRS removed (net of tax)
(1,044)
(1,196)
(1,083)
Adjustments to IFRS reserving
(111)
(168)
(144)
Tax adjustments
27
25
33
Revalue listed debt to market value
(51)
42
5
Fair value adjustments1
(2)
7
(4)
Eliminate after tax pension scheme surpluses (including IFRIC14 adjustments)2
(258)
(194)
(210)
Other adjustments
5
(4)
6
MCEV net worth attributable to owners of the parent
243
(93)
121
MCEV value of in-force business included (net of tax) as set out in note 2
2,085
2,340
2,257
Closing Group MCEV
2,328
2,247
2,378



1 Investments carried at amortised cost under IFRS are revalued at market value.
2 Pension scheme surpluses valued on an IFRS basis are removed. This includes the adjustments for the irrecoverable amounts of minimum funding requirement obligations as described in note 11 of the IFRS interim financial statements and notes.
1. Basis of preparation
Overview
The supplementary information on pages 66 to 80 has been prepared on a Market Consistent Embedded Value ('MCEV') basis except for the items described further below.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in June 2008 and amended in October 2009, except that:
 risk-free rates have been defined as the annually compounded UK Government nominal spot curve plus 10basis points rather than as a swap rate curve;
 no allowance for the cost of residual non-hedgeable risk ('CNHR') has been made because, in the opinion of theDirectors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is focused entirely on the back book, and has succeeded in closing out significant legacy risks. Thetheoretical value of CNHR is disclosed separately in note1(b); and
 the asset management and management service companies' values are calculated on an IFRS basis. Under CFOForum principles and guidance productivity gains should not be recognised until achieved. This treatment isinconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management service companies, it would not provide a fair reflection of the Group's financial position. These companies are therefore reported alongside the Group's other non-life holding companies at their IFRS net asset value.
The Finance Act 2012 set the rate of corporation tax at 23% from 1 April 2013 and further reductions to 21% from 1 April 2014 and 20% from 1 April 2015 were set by the Finance Act 2013. The impact of these tax rate reductions has been reflected in the Group MCEV.
Covered business
The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management and the management service companies.
Opal Re is included within covered business and is valued on a basis consistent with the annuity business within the UK lifecompanies.
MCEV methodology
The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and liabilities are valued in line with market prices and consistently with each other.
The key components of MCEV are net worth plus the value of in-force covered business.
a) Net worth
For the Group's life companies, net worth is defined as the market value of shareholder funds plus the shareholders' interest insurplus assets held in long-term business funds less the market value of any outstanding debt of the life companies.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in the life company or as a liability in the holding company. This presentation has no impact on the overall MCEV but does affect the allocation of netassets between covered and non-covered business.
b) Value of in-force business ('VIF')
The market consistent VIF represents the present value of profits attributable to shareholders arising from the in-force business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts and frictional costs of required capital.
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed inmore detailbelow):
 deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements. These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. Inpractice, itis not necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and discounting all cash flows at risk-free rates. This is known as the 'certainty equivalent approach'; and
 stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders. Here,the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet reporting.
Present value of future profits ('PVFP')
The PVFP represents the present value of profits attributable to shareholders arising from the in-force business. The PVFP is calculated by projecting and discounting using risk-free rates, with anallowance for liquidity premiums where appropriate.
The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence tojustify; for example in allowing for future mortality improvements on annuity business.
Time value of financial options and guarantees ('TVFOGs')
The Group's embedded value includes an explicit allowance for the TVFOGs embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees toshareholders is calculated using market-consistent stochastic models calibrated to the market prices of financial instruments as at the period end.
The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles andPractices of Financial Management. The modelling of management actions vary for each of the funds buttypically include management of bonus rates and policyenhancements, charges to asset shares to cover increases to the cost of guarantees and alterations to investment strategy.
Frictional cost of capital ('COC')
Cost of capital is defined as the difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns onthat capital, investment expenses and taxes.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Pillar 1 andPillar2 capital requirements, plus the capital required under the Group's capital management policy.
This equates to 150% of Pillar 1 capital or 128% of Pillar 2 capital (30 June 2013: Pillar 1: 147%, Pillar 2: 129%; 31 December 2013: Pillar 1: 145%, Pillar 2: 128%).
Solvency II aims to introduce a new capital regime for insurers. no allowance has been made within the Group's MCEV information for the impact of this developing regime.
Costs of residual non-hedgeable risks ('CNHR')
The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks havenotalready been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFOForum principles and guidance does not anticipate further risk management actions andtherefore does not provide afairreflection of the Group's ongoing risk.
However, the CNHR calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating further risk management actions, has been disclosed below.
For with-profits business the CNHR would increase the TVFOGs by 21 million (30 June 2013: 40 million; 31December 2013: 25million).
For other business the cost would be 107 million (30 June 2013: 118 million; 31 December 2013: 105million). Thisequates to an equivalent average cost of capital charge of 1.1% (30 June 2013: 1.5%; 31December 2013: 1.3%). Thelevel of capital assumed in this calculation is determined based on a 99.5% confidence level over a1-year time horizon, consistent with the ICA methodology. Allowance ismade for diversification benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.
c) Valuation of debt
Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent withMCEV principles.
The National Provident Life limited recourse bonds are backed by surpluses that are expected to emerge on blocksof itsunitlinked and unitised with-profits business. This securitisation has been valued on a cash flow basis,allowing for payments expected to be due based onthe projected level of securitised surpluses emerging. The full VIF of the securitised unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.
Unlisted bank debt owed by the holding companies is included at face value.
d) Taxation
Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets outofnon-profit funds. Thisallowance reflects the projected pace of releases of surplus from non-profit funds thatis notrequired to support withprofit funds.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies. The value ofthe tax relief is determined by offsetting the tax payable on profits emerging from coveredbusiness against the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by the projected embedded value ofthe Group's businesses.
e) New business
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteedannuity terms. The value is calculated based on management's assumptions as to long-term profit margins and projected take-up rates. As at 30 June 2014, the Group MCEV included 133 million in respect of these policies (31 December 2013: 191 million). These policies are excluded from the definition of new business on the basis that the annuitybeing provided isan obligation under an existing policy and the life companies are already reserving for thecostofthese guarantees.
New business includes all other annuities written by the life insurance companies.
f) Participating business
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
The time value of options and guarantees used in the calculation of MCEV also allows for expected management andpolicyholder responses to the varying external economic conditions simulated by the economic scenario generators. Policyholder response has been modelled based on historical experience. Management actions have been set in accordance with each life company's Principles and Practices of Financial Management.
g) Pension schemes
The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension schemesurpluses.
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding requirement and, to theextent that the contributions payable would result in a surplus that would not be recoverable, a liability is recognised when the obligation arises. The IFRS IFRIC 14 adjustments are not reflected in the Group MCEV as the Group does not anticipate that its ultimate contributions into the pension schemes would result in an unrecoverable surplus.
h) Events after the reporting period
On 1 July 2014, the Group completed the divestment of Ignis Asset Management to Standard Life Investments (Holdings) Limited ('Standard Life Investments') and gross cash consideration of 390 million was received. 250 million of these proceeds were used to prepay the Impala loan facility. Ignis Asset Management has been classified as a discontinued operation and generated a loss after tax for the period of 18 million (30 June 2013: 21 million, 31 December 2013: 42 million). This loss after tax excludes intragroup fee income after tax of 30 million in the period (30 June 2013: 33 million, 31December 2013: 78 million).
On 7 July 2014 the Group's new financing subsidiary, PGH Capital Limited, issued a 300 million 7 year senior unsecured bond at an annualcoupon rate of 5.75%. The net proceeds from the bond issue of 296 million were used to prepay the Impala loan facility.
On 23 July 2014 PGH Capital Limited entered into a new 900 million 5 year unsecured bank facility which along with a 206 million debt prepayment from internal resources was used to refinance the entirety of the Group's existing two bank facilities and PIK notes, replacing the Pearl and Impala loan facilities with a single debt facility.
The new facility comprises a 450 million revolving credit facility ('RCF') loan and a 450 million amortising term loan. Both loans are repayable by July 2019 with an option to request an extension to the term of the RCF loan by two years to July 2021. Further terms of thefacilities agreement include:
 Term facility repayment instalments of 30 million are due semi-annually on 30 June and 31 December each year. Additional target repayments of 30 million may be paid semi-annually on 30 June and 31 December each year from 30 June 2015, non-payment of whichwould trigger restrictions on the Group regarding the declaration of dividends;
 The term loan bears interest at LIBOR plus an opening margin of 3.50% p.a. and the RCF loan at LIBOR plus an opening margin of 3.25% p.a.. After six months the margins will change in accordance with a margin ratchet which operates by reference to the Group's gearing ratio. Margins will reduce by 0.50% on achievement of an investment grade rating.
 Amongst other fees, a utilisation fee of 0.25% p.a. is payable in respect of the RCF loan for so long as the amount outstanding under the RCF exceeds 50% of the total commitments of the RCF loan.
The value of in-force business as at 30 June 2014 has been reduced by 36 million to reflect the lower level of tax attributes expected to be available to relieve tax on emerging surpluses due to the accelerated repayment of debt following the divestment of Ignis and the refinancing of the Pearl and Impala facilities.
On 31 July 2014 the Group entered into a reinsurance agreement, effective 1 January 2014, to transfer approximately 1.7 billion of annuity in-payment liabilities, currently held within the Group's with-profit funds, to Guardian Assurance Limited ('Guardian'). On 11 August 2014 theGroup made an associated transfer of 1.7 billion of assets to Guardian as the related reinsurance premium for the transferred annuity liabilities. The impact of this transaction has been recognised as at 30 June 2014 and has decreased the MCEV by 14 million.
On 20 August 2014, the Board declared an interim dividend per share of 26.7p for the half year ended 30 June 2014. The cost of this dividend has not been recognised as a liability in the interim financial statements for the period to 30 June 2014 and will be charged to thereconciliation of movement in equity when paid.
2. Components of the MCEV of covered business
Half year ended
30 June 2014
m
Half year ended
30 June 2013
m
Year ended
31 December 2013
m
Net worth
748
603
802
PVFP
2,119
2,397
2,301
TVFOG
(27)
(41)
(39)
COC
(7)
(16)
(5)
Total VIF
2,085
2,340
2,257

2,833
2,943
3,059




The net worth of covered business of 748 million at 30 June 2014 (30 June 2013: 603 million; 31 December 2013: 802 million) consists of 379 million offree surplus in excess of required capital (30 June 2013: 406 million; 31 December 2013: 529 million).
3. Analysis of covered business MCEV earnings (after tax)
Half year ended 30 June 2014
Net worth
m
VIF
m
Total Life
MCEV
m
Life MCEV at 1 January 2014
802
2,257
3,059
New business value
4
3
7
Expected existing business contribution (reference rate)1
15
44
59
Expected existing business contribution (in excess of reference rate)2
(4)
17
13
Transfer from VIF to net worth
84
(84)
-
Experience variances
29
7
36
Assumption changes
13
(30)
(17)
Other operating variances
53
(9)
44
Life MCEV operating earnings
194
(52)
142
Economic variances
16
(38)
(22)
Other non-operating variances
(37)
(67)
(104)
Total Life MCEV earnings
173
(157)
16
Capital and dividend flows
(227)
(15)
(242)
Life MCEV at 30 June 2014
748
2,085
2,833



1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long-term risk-free rate of 3.55% (30 June 2013: 2.42%).
2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk-free rate arising from long-term risk premiums on equities, property and corporate bonds.
Half year ended 30 June 2013
Net worth
m
VIF
m
Total Life
MCEV
m
Life MCEV at 1 January 2013
886
2,377
3,263
New business value
7
3
10
Expected existing business contribution (reference rate)
14
27
41
Expected existing business contribution (in excess of reference rate)
1
20
21
Transfer from VIF to net worth
83
(83)
-
Experience variances
(6)
32
26
Assumption changes
15
5
20
Other operating variances
9
-
9
Life MCEV operating earnings
123
4
127
Economic variances
8
(31)
(23)
Other non-operating variances
(7)
5
(2)
Total Life MCEV earnings
124
(22)
102
Capital and dividend flows
(407)
(15)
(422)
Life MCEV at 30 June 2013
603
2,340
2,943



Year ended 31 December 2013
Net worth
m
VIF
m
Total Life
MCEV
m
Life MCEV at 1 January 2013
886
2,377
3,263
New business value
13
5
18
Expected existing business contribution (reference rate)
27
56
83
Expected existing business contribution (in excess of reference rate)
2
40
42
Transfer from VIF to net worth
188
(188)
-
Experience variances
37
42
79
Assumption changes
- 
3
3
Other operating variances
9
74
83
Life MCEV operating earnings
276
32
308
Economic variances
60
46
106
Other non-operating variances
144
(171)
(27)
Total Life MCEV earnings
480
(93)
387
Capital and dividend flows 
(564)
(27)
(591)
Life MCEV at 31 December 2013
802
2,257
3,059
1,175
2,629
3,804
4. New business
The value generated by new business written during the period is calculated as the present value of the projected stream ofafter-tax distributable profits from that business. This contribution has been valued using economic and non-economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in-force covered business.

Premium
m
MCEV
m
MCEV/
Premium
%
Half year ended 30 June 2014
83
7
8%
Half year ended 30 June 2013
160
10
6%
Year ended 31 December 2013
286
18
6%
5. Maturity profile of business
This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projectedon acertainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted atrisk-free rates.
Years
Present value of future profits (PVFP)
1-5
m
6-10
m
11-15
m
16-20
m
20+
m
Total
30 June 2014
826
531
359
228
175
2,119
30 June 2013
1,086
577
341
213
180
2,397
31 December 2013
997
576
344
212
172
2,301







6. Assumptions
Reference rates
(a) Risk-free rates
Risk-free rates are based on the annually compounded UK Government bond nominal spot curve plus 10 basis points, extrapolated as necessary to meet the term of the liabilities
The risk-free rates assumed for a sample of terms were as follows:

30 June 2014
30 June 2013
31 December 2013
Term
Gilt yield
+10bps
Swap yield
Gilt yield
+10bps
Swap yield
Gilt yield
+10bps
Swap yield
1 year
0.74%
0.82%

0.33%
0.59%

0.51%
0.61%
5 years
2.09%
2.21%

1.50%
1.57%

2.08%
2.16%
10 years
2.97%
2.86%

2.75%
2.65%

3.32%
3.11%
15 years
3.40%
3.19%

3.40%
3.17%

3.79%
3.48%
20 years
3.62%
3.34%

3.71%
3.42%

3.92%
3.60%









Had the Group used the swap rate curve as set out in the CFO Forum principles, the MCEV would have been 118 million lower (30June2013: 168 million lower; 31 December 2013: 160 million lower).
(b) Liquidity premiums
In October 2009, the CFO Forum published an amendment to the MCEV principles to reflect the inclusion of a liquidity premium. Thechanges affirm that the reference rate may include a liquidity premium over and above the risk-free yield curve for liabilities which arenot liquid, given that the matching assets are able to be held tomaturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or inthe-money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is as follows:
30 June 2014
30 June 2013
31 December 2013
Additional yield over risk-free rates
0.35%
0.51%
0.36%




Inflation
For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index ('RPI') as at 30 June 2014 was taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase inUKNational Average Earnings inflation is assumed to beRPI plus 100 basis points (30 June 2013: RPI plus 100 basis points; 31 December 2013: RPI plus 100 basis points).
Stochastic economic assumptions
The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated tomarket conditions as at 30 June 2014. The scenario generator and calibration are consistent with that used forrealistic balance sheet reporting.
A LIBOR Market Model is used to generate risk-free rates over a complete yield curve, calibrated to the UK nominal spot curve plus 10 basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.
Option term (years)
Interest rate volatility
5
10
15
20
25
30
30 June 2014 Swap term (years)






5
23.3%
19.3%
17.0%
16.7%
16.3%
16.1%
10
20.7%
18.3%
16.7%
16.1%
15.6%
15.3%
20
18.2%
16.8%
15.2%
14.2%
13.5%
12.9%
30
17.1%
15.8%
14.1%
12.8%
11.8%
11.1%

Option term (years)
Interest rate volatility
5
10
15
20
25
30
30 June 2013 Swap term (years)






5
24.0%
18.6%
17.0%
16.5%
16.8%
16.3%
10
21.3%
17.8%
16.3%
15.9%
15.8%
15.4%
20
19.4%
17.0%
15.4%
14.6%
14.5%
14.0%
30
18.7%
16.4%
14.7%
13.8%
13.4%
12.7%







Option term (years)
Interest rate volatility
5
10
15
20
25
30
31 December 2013 Swap term (years)






5
23.1%
17.3%
16.5%
16.3%
16.2%
15.9%
10
19.9%
16.3%
15.4%
15.1%
14.9%
14.7%
20
18.1%
15.5%
14.2%
13.5%
13.2%
12.7%
30
17.0%
14.9%
13.4%
12.4%
11.8%
11.2%







Real interest rates have been modelled using the two-factor Vasicek model, calibrated to index-linked gilts.
Equity volatility is calibrated to replicate the prices on a range of FTSE equity options, and extrapolated beyond terms available in the market. The equity volatility model used allows volatility to vary with both term and the level of the equity index.
Term (years)
Equity implied volatility (ATM)
5
10
15
20
25
30
30 June 2014
20.5%
20.4%
20.8%
21.3%
21.8%
22.3%
30 June 2013
21.7%
25.0%
25.7%
26.4%
27.2%
28.0%
31 December 2013
18.9%
22.1%
22.4%
22.9%
23.3%
23.7%







Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 30 June 2014 is 15% (2013:15%).
The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, with an additional allowance forthe credit risk premium, derived from current markets.
Operating earnings
The Group uses normalised investment returns in calculating the expected existing business contribution. The Group considers that anaverage return over the remaining term of our in-force business is more appropriate than using a short-term rate and is more consistentwith the Group's expectation of longer-term rates of return. Therefore the Group calculates theexpected contribution on existingbusiness using a 15-year gilt rate at the beginning of the reporting period plus 10 basis points and long-term expectations of excessinvestment returns.
The table below sets outs the asset risk premiums used:

Half year ended
30 June 2014
Half year ended
30 June 2013
Year ended
31 December
2013
Equities
3.0%
3.0%
3.0%
Property
2.0%
2.0%
2.0%
Gilts
0.0%
0.0%
0.0%
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance forcredit risk.
Expenses
Each life company's projected per policy expenses are based on existing management services agreements with the Group's management service companies, adjusted to allow for additional costs incurred directly by the life companies, including, forexample, regulatory fees and one-time expenses.
The life companies' projected investment expenses are based on the fees agreed with Ignis Asset Management (orexternal fund managers, where appropriate), allowing for current and projected future asset mixes.
Valuation of debt and non-controlling interests
The Group's consolidated balance sheet as at 30 June 2014 includes Perpetual Reset Capital Securities witha principal outstanding of 425million (2013: 425 million) and subordinated debt with a face value of 200 million (2013: 200 million). These listed securities have been included within the MCEVattheir market value quoted at the reporting date.
The table below summarises the value of these debt obligations without adjustment for internal holdings in the Perpetual Reset Capital Securities and the Pearl facility.

Half year ended
30 June 2014

Half year ended
30 June 2013

Year ended
31 December 2013

Face value
(including accrued
interest)
m
Market
value
m

Face value
(including
accrued
interest)
m
Market
value
m
Face value
(including
accrued
interest)
m
Market
value
m
Listed debt and non-controlling interests







Perpetual Reset Capital Securities
430
420
430
344

444
377
Phoenix Life Limited subordinated debt
204
214
204
187

211
205
Unlisted debt has been included at face value.

Half year ended 30 June 2014
Face value
m
Half year ended
30 June 2013
Face value
m
Year ended
31 December
2013
Face value
m
Unlisted debt


Pearl and Impala facilities
1,528
1,773
1,612
Royal London PIK notes and facility
124
119
121
7. Sensitivity to assumptions
The table below summarises the key sensitivities of the MCEV of covered business at 30 June 2014:
30 June 2014
Life MCEV
m
31 December 2013
Life MCEV
m
(1) Base
2,833
3,059
(2) 1% decrease in risk-free rates
27
11
(3) 1% increase in risk-free rates
(26)
7
(4) 10% decrease in equity market values
(51)
(41)
(5) 10% increase in equity market values
39
47
(6) 10% decrease in property market values
(39)
(46)
(7) 10% increase in property market values
38
45
(8) 100bps increase in credit spreads1
(159)
(143)
(9) 100bps decrease in credit spreads1
149
148
(10) 25% increase in equity/property implied volatilities
(11)
(7)
(11) 25% increase in swaption implied volatilities
(8)
6
(12) 25% decrease in lapse rates and paid-up rates
(21)
(25)
(13) 5% decrease in annuitant mortality
(127)
(122)
(14) 5% decrease in non-annuitant mortality
17
28
(15) Required capital equal to the minimum regulatory capital
2
1
1 25bps is assumed to relate to default risk.
2 Minimum regulatory capital is defined as the greater of Pillar 1 and Pillar 2 capital requirements without any allowance for the Group's capital managementpolicy.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the terms ofagreements with the management services companies.
ADDITIONAL INFORMATION
SHAREHOLDER INFORMATION
82
FORWARD-LOOKING STATEMENTS
83
SHAREHOLDER INFORMATION
Annual General Meeting
Our Annual General Meeting was held on 30 April 2014.
The voting results for our 2014 AGM are available on our website at www.thephoenixgroup.com.
Shareholder services
Our registrar, Computershare, maintains the Company's register of members. Shareholders may request a hard copy ofthis Interim Report from our registrar and if you have any further queries in respect of your shareholding, please contact them directly using the contact details set out below:
Computershare Investor Services (Cayman) Limited
Queensway House
Hilgrove Street
St Helier
Jersey, JE1 1ES
Shareholder helpline number  +44 (0) 870 707 4040
Fax number  +44 (0) 870 873 5851
Shareholder helpline email address  info@computershare.co.je
Share price
You can access the current share price of Phoenix Group Holdings at www.thephoenixgroup.com.
Group financial calendar for 2014
Announcement of unaudited six months' interim results 
21 August 2014
Announcement of third quarter interim management statement 
23 October 2014


2014 interim dividend
Ex-dividend date 
3 September 2014
Record date
5 September 2014
Interim 2014 dividend payment date
2 October 2014
2014 annual results
Our financial results for the year ended 31 December 2014 will be announced on 18 March 2015.
FORWARD-LOOKING STATEMENTS
The Interim Report 2014 contains, and we 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', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' orother words of similar meaning are forward-looking. Such forward-looking statements and other financial and/or statistical data involve risk anduncertainty because they relate to future events and circumstances that are beyond theGroup's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to:
 Domestic and global economic and business conditions
 Asset prices
 Market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally
 The policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related tothe financial crisis and ultimate transition to the European Union's 'SolvencyII'Directive on the Group's capital maintenance requirements
 The impact of inflation and deflation
 Market competition
 Changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates)
 The timing, impact and other uncertainties of future acquisitions or combinations within relevant industries
 Risks associated with arrangements with third parties
 Inability of reinsurers to meet obligations or unavailability of reinsurance coverage
 The impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations inthe 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 Interim Report 2014.
The Group undertakes no obligation to update any of the forward-looking statements or data contained within the Interim Report 2014 or any other forward-looking statements or data it may make or publish.
The Interim Report 2014 has been prepared for the members of the Company andno one else. The Company, its directors or agents do not accept or assume responsibility toanyother person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the Interim Report 2014 is, or should be construedas a profitforecast or estimate.
Phoenix Group Holdings
Registered address:
Phoenix Group Holdings
PO Box 309
Ugland House
Grand Cayman KY1-1104
Cayman Islands
Cayman Islands Registrar of Companies number 202172
Principal place of business:
Phoenix Group Holdings
1st Floor
32 Commercial Street
St Helier JE2 3RU
Jersey
www.thephoenixgroup.com

This information is provided by RNS
The company news service from the London Stock Exchange
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