REG - Phoenix Grp Hldgs - 2014 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 7
29/10/2014 14:21
- Part 7: For the preceding part double click ID:nRSU6799Pf
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 of
after-tax distributable profits from that business. This contribution has been valued using economic and non-economic
assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding
required capital on the same basis as for the in-force covered business.
Premium MCEV MCEV/
£m £m 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 projected on a
certainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted at risk-free rates.
Years
Present value of future profits (PVFP) 1-5 6-10 11-15 16-20 20+ Total
£m £m £m £m £m
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 Swap yield Gilt yield Swap yield Gilt yield Swap yield
+10bps +10bps +10bps
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
(30 June 2013: £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. The changes affirm that the reference rate may include a liquidity premium over and above the risk-free yield
curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits
defined as an annuity or in-the-money guaranteed annuity options. The liquidity premium is determined by reference to the
yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and
unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is
as follows:
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 in UK National
Average Earnings inflation is assumed to be RPI 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 to
market conditions as at 30 June 2014. The scenario generator and calibration are consistent with that used for realistic
balance sheet reporting.
A LIBOR Market Model is used to generate risk-free rates over a complete yield curve, calibrated to the UK nominal spot
curve plus 10 basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to
swaption implied volatilities, as per the sample below.
Option term (years)
Interest rate volatility 5 10 15 20 25 30
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 for the credit risk premium, derived from current markets.
Operating earnings
The Group uses normalised investment returns in calculating the expected existing business contribution. The Group
considers that an average return over the remaining term of our in-force business is more appropriate than using a
short-term rate and is more consistent with the Group's expectation of longer-term rates of return. Therefore the Group
calculates the expected contribution on existing business using a 15-year gilt rate at the beginning of the reporting
period plus 10 basis points and long-term expectations of excess investment returns.
The table below sets outs the asset risk premiums used:
Half year ended Half year ended Year ended
30 June 2014 30 June 2013 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 for credit
risk.
Expenses
Each life company's projected per policy expenses are based on existing management services agreements with the Group's
management service companies, adjusted to allow for additional costs incurred directly by the life companies, including,
for example, regulatory fees and one-time expenses.
The life companies' projected investment expenses are based on the fees agreed with Ignis Asset Management (or external
fund managers, where appropriate), allowing for current and projected future asset mixes.
Valuation of debt and non-controlling interests
The Group's consolidated balance sheet as at 30 June 2014 includes Perpetual Reset Capital Securities with a principal
outstanding of £425 million (2013: £425 million) and subordinated debt with a face value of £200 million (2013: £200
million). These listed securities have been included within the MCEV at their market value quoted at the reporting date.
The table below summarises the value of these debt obligations without adjustment for internal holdings in the Perpetual
Reset Capital Securities and the Pearl facility.
Half year ended Half year ended Year ended
30 June 2014 30 June 2013 31 December 2013
Face value Market Face value Market Face value Market
(including accrued value (including value (including value
interest) £m accrued £m accrued £m
£m interest) interest)
£m £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 Half year ended Year ended
Face value 30 June 2013 31 December
£m Face value 2013
£m 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 31 December 2013
Life MCEV Life MCEV
£m £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 capital² 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 management policy.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the
terms of agreements with the management services companies.
ADDITIONAL INFORMATION
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 of this
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' 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 we have estimated. Other factors which could cause actual results to differ materially from
those estimated by forward-looking statements include but are not limited to:
− Domestic and global economic and business conditions
− Asset prices
− Market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets
generally
− The policies and actions of governmental and/or regulatory authorities, including, for example, new government
initiatives related to the financial crisis and 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 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 and no one else. The Company, its directors or
agents do not accept or assume responsibility to any other person in connection with this document and any such
responsibility or liability is expressly disclaimed. Nothing in the Interim Report 2014 is, or should be construed as a
profit forecast 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 ExchangeRecent news on Phoenix group
See all newsREG - Phoenix Group Hldgs - Result of AGM
AnnouncementREG - Phoenix Group Hldgs - Director/PDMR Shareholding
AnnouncementREG - Phoenix Group Hldgs - Total Voting Rights
AnnouncementREG - Phoenix Group Hldgs - Director/PDMR Shareholding
AnnouncementREG - Phoenix Group Hldgs - Director/PDMR Shareholding
Announcement