REG - Phoenix Grp Hldgs - 2015 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 2
20/08/2015 07:01
- Part 2: For the preceding part double click ID:nRST5619Wa
external regulatory changes, including the cap on workplace pension charges and the pension guidance levy
partly offset by £8 million of corporate project costs and £2 million of net other items. The prior period result included
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 to
the 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 and net £7 million of costs
associated with other items.
Finance costs attributable to owners
Half year ended 30 June 2015 £m Half year ended 30 June 2014 £m
Bank finance costs 17 36
Other finance costs 32 12
Finance costs attributable to owners 49 48
Debt finance costs have increased by £1 million, reflecting the recognition of £12 million of finance costs relating to the
new PGH Capital subordinated notes which were exchanged for the Tier 1 notes in January 2015. The coupon payable on the
Tier 1 notes was previously recognised directly in equity. This has been largely offset by the impact of lower debt
principal balances following debt repayments and the restructuring of the bank debt.
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 11 May 2010.
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 subsidiaries, excluding Opal Re, have their centre of operations.
The Group tax charge for the period attributable to owners from continuing operations is £1 million (HY14: £49 million)
based on a profit (after policyholder tax) of £79 million (HY14: £258 million). The actual charge is lower than the
expected charge (based on the UK corporation tax rate of 20.25%) of £16 million primarily due to certain profit being
either non-taxable or taxable at rates other than the standard rate and the recognition of previously unrecognised deferred
tax assets (see note 6 to the IFRS condensed consolidated interim financial statements for analysis with respect to
continuing operations). The tax credit attributable to discontinued operations is £nil (HY14: £9 million).
Capital management
Capital management
The Group has continued to focus on capital and gearing during the period. Our capital position remains robust, the IGD
surplus is £1.6 billion and the PLHL ICA surplus is £0.7 billion at 30 June 2015. In August 2015, Fitch Ratings assigned
the Group an investment grade credit rating.
Regulatory capital requirements
IGD surplus (estimated)
Each UK life company must maintain sufficient capital at all times to meet the regulatory capital requirements mandated by
the PRA. These measures are aggregated under the European Union Insurance Groups' Directive ('IGD') to calculate regulatory
capital adequacy at a Group level.
The Group's IGD assessment is made at the level of the highest EEA insurance group holding company, which is Phoenix Life
Holdings Limited ('PLHL'), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 30 June 2015 is £1.6
billion (YE14: £1.2 billion). The components of the estimated IGD calculation are shown below:
Half year ended 30 June 2015 £bn Year ended 31 December 2014 £bn
Group capital resources ('GCR') 6.5 5.5
Group capital resource requirement ('GCRR') (4.9) (4.3)
IGD surplus (estimated) 1.6 1.2
The estimated IGD surplus has increased by £0.4 billion in the period. The increase is primarily due to the simplification
of the Group's corporate structure, with PLHL now recognising 100% of the capital resources and requirements of Impala
Holdings Limited and its subsidiaries which has benefited the IGD surplus by £0.3 billion. The surplus of £1.6 billion
represents headroom of £0.8 billion (YE14: £0.5 billion) over the Group's IGD regulatory capital policy.
The Group's regulatory 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 of with-profit funds
plus
- 145% of the GCRR less the WPICC.
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. The estimated
PLHL ICA position at 30 June 2015 is set out below:
Half year ended 30 June 2015 £bn Year ended 31 December 2014 £bn
Capital resources1 1.0 1.0
Capital resource requirements2 (0.3) (0.3)
PLHL ICA surplus (estimated) 0.7 0.7
1 Capital resources includes the surplus over capital policy in the life companies and the net assets of the holding
companies less pension scheme obligations calculated on an economic basis.
2 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 £0.6 billion as at 30 June 2015 (31 December 2014: £0.6
billion).
The PLHL ICA surplus has remained stable during the period. The simplification of the Group structure has not impacted the
PLHL ICA surplus as the risk based calculation has historically recognised 100% of the capital resources and requirements
of Impala Holdings Limited and its subsidiaries.
Sensitivity and scenario 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 Estimated PLHL ICA surplus
30 June 2015 30 June 2015
£bn £bn
Sensitivity analysis
Base: 30 June 2015 1.6 0.7
Following a 20% fall in equity markets 1.6 0.6
Following a 15% fall in property values 1.6 0.6
Following a 75bps increase in nominal yields1 1.5 0.8
Following a 75bps decrease in nominal yields1 1.6 0.6
Following credit spread widening2 1.6 0.5
1 75bps increase/decrease in nominal yields and a 75bps increase/decrease in inflation.
2 11-15 year term: AAA - 46bps, AA - 69bps, A - 102bps, BBB - 144bps.
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.
Capital resources
Capital resources
The primary sources of capital used by the Group comprise equity shareholder funds as measured on an MCEV basis and
shareholder borrowings.
Leverage
In managing capital the Group seeks to optimise the level of debt on its balance sheet. 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 to fund upfront capital requirements and new business acquisition expenses.
Financial leverage ratio
The Group monitors the level of debt in its statement of consolidated financial position by reference to the financial
leverage ratio. The financial leverage ratio is used to determine the interest margin payable on the PGH Capital bank
facility.
The financial leverage ratio as at 30 June 2015 decreased to 39.2% (YE14: 39.3%) reflecting debt repayments in the period.
The financial leverage ratio is calculated as gross shareholder debt1 as a percentage of gross MCEV2. Gross shareholder
debt and shareholder debt (including hybrid debt) included in MCEV at 30 June 2015 are set out in the table below:
Half year ended 30 June 2015 £m Year ended 31 December 2014 £m
PGH Capital facility 780 840
PGH Capital senior bond 300 300
PGH Capital subordinated notes3 396 -
PLL subordinated debt 200 200
Tier 1 note4 6 394
Gross shareholder debt 1,682 1,734
Adjustments to include the following items at fair value:
PLL subordinated debt 12 12
PGH Capital senior bond 20 22
PGH Capital subordinated notes 7 -
Tier 1 notes4 - (7)
Shareholder debt included in MCEV 1,721 1,761
1 Gross shareholder debt is defined as the notional face value of the shareholder and hybrid debt.
2 Gross MCEV is defined as the sum of Group MCEV and the value of shareholder and hybrid debt as included in the MCEV.
3 Total face value of the PGH Capital subordinated notes is £428 million (YE14: £nil), of which bonds with a face value of
£32 million (YE14: £nil) are held by Group companies.
4 Total face value of the Tier 1 notes is £6 million (YE14: £425 million), of which bonds with a face value of £nil (YE14:
£31 million) are held by Group companies.
The Group's gross shareholder debt decreased by £52 million to £1,682 million in the period. This reduction includes a
prepayment of £30 million and a scheduled repayment of £30 million in respect of the PGH Capital facility.
In January 2015, the Group announced the exchange of 99% of the Group's Tier 1 notes for £428 million of new subordinated
notes, issued by PGH Capital. As the new notes mature in 2025, the notes will be included in the financial leverage
calculation at their notional face value of £396 million, excluding notes with a face value of £32 million held by Group
companies.
In August 2015, Fitch Ratings assigned the Group an investment grade credit rating, which will trigger a further 50bps
margin reduction on the outstanding bank facility effective from 28 August 2015. The Group's financial leverage target is
to manage our financial leverage to a level that is consistent with maintaining an investment grade credit rating.
Further detail on shareholder debt is included in note 13 to the IFRS condensed consolidated interim financial statements.
PrincipAL risks and uncertainties
facing the Group
Principal risks and uncertainties facing the Group
The Group's top principal risks and uncertainties are detailed in the table below together with their potential impact,
mitigating actions which are in place and the change in the risk from last year. As economic changes occur and the industry
and regulatory environment evolves, the Group will continue to monitor the potential impact of these principal risks and
uncertainties facing the Group.
Change in risk TREND
from last year
Risk improving -
No change «
Risk deteriorating ¯
Risk Impact Mitigation Change from last year
In times of severe market turbulence, the Group may not have sufficient capital or liquid assets to meet its cash flow targets or it may suffer a loss in value. The emerging cash flows of the Group may be impacted during periods of severe market turbulence by the need to maintain The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In response to this, the Group has implemented de-risking strategies to mitigate against adverse customer and shareholder outcomes. The Group also maintains cash buffers in its holding companies to reduce reliance on emerging cash flows. -Yields on UK government debt have increased over the past six months, which has improved the Group's excess capital position. The position is closely managed and actions are implemented in response to market movements.
appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the
Group's embedded value.
Significant counterparty failure. Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual The Group regularly monitors its counterparty exposure and has specific limits relating to individual holdings and counterparty credit rating. Where possible, exposures are diversified through the use of a range of counterparty providers. All material Reinsurance and derivative positions are appropriately collateralised and guaranteed. «The Group continues to monitor counterparty exposures holistically across all counterparty obligations, both in respect of debt securities and trading.In some cases individual counterparty holdings have been adjusted to ensure the Group remains within risk appetite.
or perceived creditworthiness or default of issuers of relevant debt securities. The Group is also exposed to trading
counterparties failing to meet all or part of their obligations, such as reinsurers failing to meet obligations assumed under
Reinsurance arrangements or stock-borrowers failing to pay as required. 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.
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 The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions. The Group has also entered into a Reinsurance contract to manage this risk within appetite. «There has been no adverse change in experience over the period.
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 implementation of the Solvency II Directive may impair the ability of the Group to meet cash flow targets. During 2015, our activities in relation to Solvency II have been focused on the preparation of the Group's Internal Model The Group's IMAP submission was completed on 30 June 2015. Whilst the outcome of the submission is not yet known, the Group continues to work closely with the PRA on the implementation of the Directive. Contingency plans continue to be developed to mitigate adverse outcomes, should these be required. «Over 2015, clarity on Solvency II regulations has improved but uncertainties remain in relation to the Group's IMAP and other Solvency II-related applications.
Application (IMAP), as well as on monitoring the impact of, and reacting to, the developing Solvency II regulations.
Changes in the regulatory and legislative landscape may impact the way that Phoenix Life engages with its customers. The move to the conduct-focused regulator has seen a continued move away from rules-based regulation with a greater focus on The Group puts considerable effort into improving customer outcomes and managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes to the regulatory landscape. The Group assesses the risks of regulatory change and the impact on our operations and lobbies where appropriate. ¯2014 and 2015 have seen a number of key regulatory changes to the UK life insurance sector.The financial impacts of several of these changes have not yet fully crystallised and the Group continues to take actions to prepare for the possible range of outcomes, including the way in which our customers have reacted to the new options available at retirement.
customer outcomes. This may challenge the existing approach and/or may result in remediation exercises where regulatory
expectations differ from existing practices.
Changes in the retirement marketplace may result in poor outcomes for customers. The changes in the retirement marketplace have opened up a number of new options for customers. While these options provide Phoenix Life has made a number of changes to its retirement processes to take account of the changes. These include ensuring that appropriate risk warnings are provided to customers in advance of them taking a course of action. This is aligned to the new rules that the FCA have outlined in PS15/4. -The required changes to support the pension reforms on 6 April were successfully implemented. A partnership arrangement is in place that enables Phoenix customers to access the full range of retirement-related advice services and products. Customers also retain the option of accessing these services/products from elsewhere in the marketplace.
greater flexibility for customers, customers need to engage with the process to ensure they make informed decisions that are
suitable for their needs. Additionally, providers need to ensure that their processes facilitate effective decision making by
customers. Failure to do this may result in a risk that a customer takes an option that they do not understand or that may not
be appropriate for them.
The current assessment of the residual risk in respect of each of the Group's principal risks is illustrated in the chart
opposite.
The residual risk is the remaining risk after controls and mitigating actions have been taken into account.
The Group's senior management and Board also take emerging risks into account when considering potentially adverse outcomes
and appropriate management actions prior to the risk crystallising.
Some of the current emerging risks the Group considers are listed in the table below.
Risk Title Description Risk Universe Category
Regulatory thematic reviews The unknown consequences and the potential impact, including retrospective activity, to the Group as a result of reviews conducted by the regulators or HM Treasury. Customer
Pressure on charges The potential impact of regulatory focus and industry wide reviews on Policyholder charges expected over the course of the next year. Customer
IFRS FINANCIAL STATEMENTS
21
STATEMENT OF DIRECTORS' RESPONSIBILITIES
22
Auditor'S review report
23
Condensed consolidated interim financial statements and notes
52
Additional life company ASSET DISCLOSURES
statement of DIRECTORS' RESPONSIBILITIES
The Board of Directors of Phoenix Group Holdings hereby declares that, to the best of its knowledge:
- the condensed consolidated interim financial statements for the half year ended 30 June 2015, 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 2015 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 in related party transactions described in the last annual report.
CLIVE BANNISTER JAMES MCCONVILLE
Group Chief Executive Officer Group Finance Director
St Helier, Jersey
19 August 2015
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 financial report for
the six months ended 30 June 2015 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 of consolidated 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 51. We have read the other
information contained in the interim financial 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 financial 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 IFRSs. The condensed
set of financial statements included in this interim financial 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
financial 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 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 condensed set of financial
statements in the interim financial report for the six months ended 30 June 2015 is not prepared, in all material respects,
in accordance with International Accounting Standard 34.
Ernst & Young LLP
London
19 August 2015
Condensed Consolidated income
statement
For the half year ended 30 June 2015
Notes Half year ended 30 Jun 2015 £m Half year ended 30 Jun 2014 £m Year ended 31 Dec 2014 £m
Continuing operations
Gross premiums written 415 513 981
Less: premiums ceded to reinsurers (28) (31) (1,792)
Net premiums written 387 482 (811)
Fees 47 50 94
Net investment income 372 2,052 6,034
Total revenue, net of reinsurance payable 806 2,584 5,317
Gain on transfer of business - 4 4
Other operating income 4 5 9
Net income 810 2,593 5,330
Policyholder claims (1,851) (1,888) (3,724)
Less: reinsurance recoveries 150 109 341
Change in insurance contract liabilities 1,617 56 (1,990)
Change in reinsurers' share of insurance contract liabilities (233) 12 1,651
Transfer from/(to) unallocated surplus 40 (19) (11)
Net policyholder claims and benefits incurred (277) (1,730) (3,733)
Change in investment contract liabilities (126) (187) (408)
Acquisition costs (4) (5) (9)
Change in present value of future profits (4) (8) (9)
Amortisation of acquired in-force business (45) (53) (98)
Amortisation of customer relationships and other intangibles (7) (7) (15)
Administrative expenses (218) (202) (429)
Net income attributable to unitholders (12) (29) (8)
Total operating expenses (693) (2,221) (4,709)
Profit before finance costs and tax 117 372 621
Finance costs (69) (82) (156)
Profit for the period before tax 48 290 465
Tax attributable to policyholders' returns 6 31 (32) (129)
Profit before the tax attributable to owners 79 258 336
Tax credit/(charge) 6 30 (81) (151)
Add: tax attributable to policyholders' returns 6 (31) 32 129
Tax charge attributable to owners 6 (1) (49) (22)
Profit from continuing operations for the period attributable to owners 78 209 314
Discontinued operations
(Loss)/profit from discontinued operations, net of tax 3 - (18) 92
Profit for the period attributable to owners 78 191 406
Notes Half year ended 30 Jun 2015 £m Half year ended 30 Jun 2014 £m Year ended 31 Dec 2014 £m
Attributable to:
Owners of the parent 51 144 310
Non-controlling interests 10 27 47 96
78 191 406
Earnings per share
Basic earnings per share 7 22.7p 64.1p 137.7p
Diluted earnings per share 7 22.7p 64.1p 137.5p
Earnings per share from continuing operations
Basic earnings per share from continuing operations 7 22.7p 72.3p 96.7p
Diluted earnings per share from continuing operations 7 22.7p 72.3p 96.5p
condensed statement of consolidated
comprehensive income
For the half year ended 30 June 2015
Notes Half year ended 30 Jun 2015 £m Half year ended 30 Jun 2014 £m Year ended 31 Dec 2014 £m
Profit for the year from continuing operations 78 209 314
(Loss)/profit from discontinued operations - (18) 92
78 191 406
Other comprehensive (expense)/income:
Items that are or may be reclassified to profit or loss:
Foreign exchange rate movements - (8) 10
Reclassification adjustments relating to foreign collective investment schemes disposed of in the period (10) - -
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability (43) 71 240
Tax credit relating to other comprehensive income items 6 1 8 11
Total other comprehensive (expense)/income for the period (52) 71 261
Total comprehensive income for the period 26 262 667
Attributable to:
Owners of the parent (1) 215 571
Non-controlling interests 10 27 47 96
26 262 667
PRO FORMA RECONCILIATION OF GROUP OPERATING
PROFIT
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