REG - Phoenix Grp Hldgs - 2014 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 6
29/10/2014 14:21
- Part 6: For the preceding part double click ID:nRSU6799Pe
- - -
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 Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£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 Participating Participating Unit-linked Total
£m supported non-supported £m £m
£m £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 Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£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 Participating Participating Unit-linked Total
funds supported non-supported £m £m
£m £m £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 Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£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 Participating supported Participating non-supported Unit-linked Total
£m £m £m £m £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 Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£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 of the 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 the Directors to prepare supplementary information in accordance with the MCEV principles and to
disclose and provide reasons for any non-compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exception of:
− risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10 basis points
rather than as the swap rate curve;
− the value of asset management and the management service companies has been included on an IFRS basis; and
− no allowance for the costs of residual non-hedgeable risk has been made.
Further detail on these exceptions is included in note 1, Basis of preparation.
Specifically, the Directors have:
− determined assumptions on a realistic basis, having regard to past, current and expected future experience and to
relevant external data, and then applied them consistently;
− made estimates that are reasonable and consistent; and
− provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to
enable users to understand the impact of particular transactions, other events and conditions and the Group's financial
position and financial performance.
CLIVE BANNISTER 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. 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 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 on an IFRS 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.
The Directors 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. A review of
interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK and 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 in
the 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 Half year ended Year ended
30 June 2014 30 June 2013 31 December
£m £m 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 Half year ended Year ended
30 June 2014 30 June 2013 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 of the 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 of shareholder
tax for 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 - Group MCEV basis
For the half year ended 30 June 2014
Half year ended Half year ended Year ended
30 June 2014 30 June 2013 31 December
£m £m 2013
£m
Group MCEV earnings after tax (18) (44) 162
Other comprehensive income
Actuarial gains/(losses) and pension scheme contributions 32 (2) (16)
on defined benefit pension schemes (net of tax)
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 Half year ended Year ended
30 June 2014 30 June 2013 31 December
£m £m 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 Management AssetManagement1IFRS Other Groupcompanies2IFRS Group
business services £m £m MCEV
MCEV IFRS £m
£m £m
Group MCEV at 1 January 2014 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 Management Asset Other Group Group
business services Management companies MCEV
MCEV IFRS IFRS IFRS £m
£m £m £m £m
Group MCEV at 1 January 2013 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 Management Asset Other Group Group
business services Management companies MCEV
MCEV IFRS IFRS IFRS £m
£m £m £m £m
Group MCEV at 1 January 2013 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 31 December 2013 3,059 134 108 (923) 2,378
Reconciliation of Group IFRS equity to MCEV net worth
30 June 2014 30 June 2013 31 December
£m £m 2013
£m
Group net assets attributable to owners of the parent as reported under IFRS 2,060 1,806 1,909
Goodwill and other intangibles in accordance with IFRS removed (net of tax) (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 10 basis points
rather than as a swap rate curve;
− no allowance for the cost of residual non-hedgeable risk ('CNHR') has been made because, in the opinion of the
Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is
focused entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR
is disclosed separately in note 1(b); and
− the asset management and management service companies' values are calculated on an IFRS basis. Under CFO Forum
principles and guidance productivity gains should not be recognised until achieved. This treatment is inconsistent with the
cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off.
In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the
management service companies, it would not provide a fair reflection of the Group's financial position. These companies are
therefore reported alongside the Group's other non-life holding companies at their IFRS net asset value.
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
life companies.
MCEV methodology
The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and
liabilities are valued in line with market prices and consistently with each other.
The key components of MCEV are net worth plus the value of in-force covered business.
a) Net worth
For the Group's life companies, net worth is defined as the market value of shareholder funds plus the shareholders'
interest in surplus assets held in long-term business funds less the market value of any outstanding debt of the life
companies.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in
the life company or as a liability in the holding company. This presentation has no impact on the overall MCEV but does
affect the allocation of net assets between covered and non-covered business.
b) Value of in-force business ('VIF')
The 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 in more
detail below):
− deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements.
These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not
necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and
discounting all cash flows at risk-free rates. This is known as the 'certainty equivalent approach'; and
− stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders.
Here, the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet
reporting.
Present value of future profits ('PVFP')
The 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 an allowance for liquidity premiums where
appropriate.
The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make
appropriate allowance for expected future experience where there is sufficient evidence to justify; for example in allowing
for future mortality improvements on annuity business.
Time value of financial options and guarantees ('TVFOGs')
The Group's embedded value includes an explicit allowance for the TVFOGs embedded within insurance contracts, including
investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options
and guarantees to shareholders is calculated using market-consistent stochastic models calibrated to the market prices of
financial instruments as at the period end.
The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles and Practices of
Financial Management. The modelling of management actions vary for each of the funds but typically include management of
bonus rates and policy enhancements, charges to asset 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 on that capital, investment
expenses and taxes.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Pillar 1 and Pillar 2
capital requirements, plus the capital required under the Group's capital management policy.
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 have not
already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO
Forum principles and guidance does not anticipate further risk management actions and therefore does not provide a fair
reflection of the Group's ongoing risk.
However, the CNHR calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating
further risk management actions, has been disclosed below.
For with-profits business the CNHR would increase the TVFOGs by £21 million (30 June 2013: £40 million; 31 December 2013:
£25 million).
For other business the cost would be £107 million (30 June 2013: £118 million; 31 December 2013: £105 million). This
equates to an equivalent average cost of capital charge of 1.1% (30 June 2013: 1.5%; 31 December 2013: 1.3%). The level of
capital assumed in this calculation is determined based on a 99.5% confidence level over a 1-year time horizon, consistent
with the ICA methodology. Allowance is made for diversification benefits between non-hedgeable risks, but not between
hedgeable and non-hedgeable risks.
c) Valuation of debt
Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV
principles.
The National Provident Life limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its
unit-linked and unitised with-profits business. This securitisation has been valued on a cash flow basis, allowing for
payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised
unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value
accrues to the embedded value.
Unlisted bank debt owed by the holding companies is included at face value.
d) Taxation
Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of
non-profit funds. This allowance reflects the projected pace of releases of surplus from non-profit funds that is not
required to support with-profit funds.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies.
The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against
the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of
debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by
the projected embedded value of the Group's businesses.
e) New business
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed
annuity terms. 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 annuity being provided
is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
New business includes all other annuities written by the life insurance companies.
f) Participating business
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company
practice.
The time value of options and guarantees used in the calculation of MCEV also allows for expected management and
policyholder 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 scheme
surpluses.
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding
requirement and, to the extent 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, 31 December 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 annual coupon 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 the facilities 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 which would 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 the Group 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 the reconciliation of movement in equity when paid.
2. Components of the MCEV of covered business
Half year ended Half year ended Year ended
30 June 2014 30 June 2013 31 December 2013
£m £m £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 of free 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 VIF Total Life
£m £m 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 VIF Total Life
£m £m 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 VIF Total Life
£m £m MCEV
£m
Life MCEV at 1 January 2013 886 2,377 3,263
New business value 13 5 18
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