REG - Phoenix Grp Hldgs - 2015 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 6
20/08/2015 07:01
- Part 6: For the preceding part double click ID:nRST5619We
153 1,022 381 2,587
USA 409 66 195 16 686
Germany 168 36 118 18 340
France 191 27 164 22 404
Netherlands 45 2 38 4 89
Italy 39 1 50 2 92
Ireland 4 - 4 - 8
Greece 1 - - - 1
Spain 37 - 30 2 69
Other - non-Eurozone 197 20 119 14 350
Other - Eurozone 98 2 52 9 161
At 30 June 2015 2,220 307 1,792 468 4,787
31 December 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 1,122 166 1,022 350 2,660
USA 436 71 233 16 756
Germany 191 51 151 21 414
France 227 32 197 23 479
Netherlands 51 2 35 5 93
Portugal - - 1 - 1
Italy 42 2 62 2 108
Greece 3 - - - 3
Spain 30 - 28 2 60
Other - non-Eurozone 188 21 96 14 319
Other - Eurozone 104 1 64 12 181
At 31 December 2014 2,394 346 1,889 445 5,074
The following table sets out a breakdown of the life companies' ABS holdings by country:
30 June 2015
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 458 290 398 47 1,193
USA 29 - 5 - 34
Germany - - 24 - 24
France - 1 - - 1
Netherlands 12 - 21 2 35
Italy - - 12 - 12
Spain - - 1 - 1
Luxembourg 6 - - - 6
Other - non-Eurozone 40 2 15 - 57
At 30 June 2015 545 293 476 49 1,363
31 December 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 516 323 487 56 1,382
USA 43 - 5 - 48
Germany - 2 23 - 25
France - 2 - - 2
Netherlands 19 - 28 2 49
Italy - - 5 - 5
Ireland - - 8 - 8
Spain - - 2 - 2
Other - non-Eurozone 26 4 11 - 41
At 31 December 2014 604 331 569 58 1,562
The following table sets out the credit rating analysis of the debt portfolio:
30 June 2015
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 1,152 608 1,675 47 3,482
AA 2,253 2,966 9,303 705 15,227
A 1,508 342 1,138 98 3,086
BBB 1,817 141 1,906 187 4,051
BB 266 11 186 21 484
B and below 239 - 322 5 566
Non-rated 140 11 106 315 572
At 30 June 2015 7,375 4,079 14,636 1,378 27,468
31 December 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 1,168 699 1,769 62 3,698
AA 2,257 2,981 10,130 775 16,143
A 1,549 438 1,392 137 3,516
BBB 2,154 140 2,043 207 4,544
BB 284 3 129 17 433
B and below 284 - 191 2 477
Non-rated 168 23 184 276 651
At 31 December 2014 7,864 4,284 15,838 1,476 29,462
MCEV SUPPLEMENTARY INFORMATION
59
Statement of directors' responsibilities
60
Auditor's review report
61
MCEV interim financial statements and notes
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN
RESPECT OF THE MARKET CONSISTENT
EMBEDDED VALUE
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 ten basis
points rather than as the swap rate curve;
- the value of the asset management (prior to its divestment on 1 July 2014) 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 Officer Group Finance Director
St Helier, Jersey
19 August 2015
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 2015 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 66 to 73. 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 International Financial Reporting Standards ('IFRS') basis for the half year ended 30 June 2015. 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 66 to 68.
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 66 to 68.
SCOPE OF REVIEW
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 Phoenix Group Holdings MCEV in
the Interim Report for the half year ended 30 June 2015 has not been prepared, in all material respects, in accordance with
the basis of preparation set out on pages 66 to 68.
Ernst & Young LLP
London
19 August 2015
SUMMARISED CONSOLIDATED INCOME
STATEMENT - GROUP MCEV BASIS
For the half year ended 30 June 2015
Half year ended 30 June 2015 £m Half year ended 30 June 2014 £m Year ended 31 December 2014 £m
Life MCEV operating earnings 89 181 341
Management services operating profit 15 16 36
Ignis operating profit - discontinued operations - 17 17
Group costs (13) (10) (28)
Group MCEV operating earnings before tax 91 204 366
Economic variances on life business (13) (28) 54
Economic variances on non-life business (6) (37) (64)
Other non-operating variances on life business 15 (132) (94)
Non-recurring items on non-life business (23) 59 317
Finance costs attributable to owners (56) (62) (90)
Group MCEV earnings before tax 8 4 489
Tax on operating earnings (18) (42) (78)
Tax on non-operating earnings - 20 -
Total tax (18) (22) (78)
Group MCEV earnings after tax (10) (18) 411
Analysed between:
Group MCEV earnings after tax from continuing operations (10) - 429
Group MCEV earnings after tax from discontinued operations - (18) (18)
Group MCEV earnings after tax (10) (18) 411
MCEV EARNINGS PER ORDINARY SHARE
For the half year ended 30 June 2015
Half year ended 30 June 2015 Half year ended 30 June 2014 Year ended 31 December 2014
Group MCEV operating earnings after tax
Basic1 31.9p 72.3p 128.4p
Diluted2 31.8p 72.2p 128.2p
Group MCEV earnings after tax
Basic1 (3.8p) (8.0p) 183.2p
Diluted2 (3.8p) (8.0p) 182.8p
1 Based on 224 million shares (half year ended 30 June 2014: 225 million; year ended 31 December 2014: 225 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 2014: 225 million; year ended 31 December 2014: 225 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 UK corporate tax rate of 20.25% (half year ended 30
June 2014: 21.5%; year ended 31 December 2014: 21.5%).
STATEMENT OF CONSOLIDATED COMPREHENSIVE
INCOME - GROUP MCEV BASIS
For the half year ended 30 June 2015
Half year ended 30 June 2015 Half year ended 30 June 2014 Year ended 31 December 2014
£m £m £m
Group MCEV earnings after tax (10) (18) 411
Other comprehensive income
Remeasurements and pension scheme contributions on defined benefit pension schemes (net of tax) (6) 32 (27)
Total comprehensive income for the period (16) 14 384
RECONCILIATION OF MOVEMENT IN EQUITY -
GROUP MCEV BASIS
For the half year ended 30 June 2015
Half year ended 30 June 2015 Half year ended 30 June 2014 Year ended 31 December 2014
£m £m £m
Opening Group MCEV equity 2,647 2,378 2,378
Total comprehensive income for the period (16) 14 384
Issue of ordinary share capital, net of associated commissions and expenses 2 - 1
Dividends paid on ordinary shares (60) (60) (120)
Dividends paid on shares held by the employee trust and Group entities - 1 1
Shares sold by Group entities - - 4
Movement in equity for equity-settled share-based payments 2 3 7
Shares acquired by the employee benefit trust - (8) (8)
Total capital and dividend flows - external (56) (64) (115)
Closing Group MCEV equity 2,575 2,328 2,647
GROUP MCEV ANALYSIS OF EARNINGS
For the half year ended 30 June 2015
Non-covered business
Covered business MCEV £m Management services IFRS £m Other Group companies1IFRS £m GroupMCEV £m
Group MCEV at 1 January 2015 2,856 142 (351) 2,647
Operating MCEV earnings (after tax) 71 12 (10) 73
Non-operating MCEV earnings (after tax) 1 2 (86) (83)
Total MCEV earnings 72 14 (96) (10)
Other comprehensive income - - (6) (6)
Capital and dividend flows - internal (78) 2 76 -
Capital and dividend flows - external - - (56) (56)
Closing value at 30 June 2015 2,850 158 (433) 2,575
1 Comprises the Group holding companies that do not form part of the Phoenix Life division.
For the half year ended 30 June 2014
Non-covered business
Covered business MCEV £m Management services IFRS £m Asset Management1IFRS £m Other Group companies2IFRS £m Group MCEV £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
Divested business (18) - - 18 -
Capital and dividend flows - internal (224) 2 (29) 251 -
Capital and dividend flows - external - - - (64) (64)
Closing value at 30 June 2014 2,833 143 91 (739) 2,328
For the year ended 31 December 2014
Non-covered business
Covered business MCEV £m Management services IFRS£m Asset Management1IFRS £m Other Group companies2IFRS £m Group MCEV £m
Group MCEV at 1 January 2014 3,059 134 108 (923) 2,378
Operating MCEV earnings (after tax) 268 28 14 (22) 288
Non-operating MCEV earnings (after tax) (32) (8) (2) 165 123
Total MCEV earnings 236 20 12 143 411
Other comprehensive income - - - (27) (27)
Divested businesses (18) - (91) 109 -
Capital and dividend flows - internal (421) (12) (29) 462 -
Capital and dividend flows - external - - - (115) (115)
Closing value at 31 December 2014 2,856 142 - (351) 2,647
1 Relates to the Ignis division disposed of on 1 July 2014, classified as discontinued operations. The asset management
MCEV earnings after tax of £12 million includes intragroup income of £30 million.
2 Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis divisions.
RECONCILIATION OF GROUP IFRS EQUITY
TO MCEV NET WORTH
For the half year ended 30 June 2015
30 June 2015 £m 30 June 2014 £m 31 December 2014 £m
Group net assets attributable to owners of the parent as reported under IFRS 2,296 2,060 2,365
Goodwill and other intangibles in accordance with IFRS removed (net of tax) (207) (383) (217)
Value of in-force business in accordance with IFRS removed (net of tax) (979) (1,044) (1,011)
Adjustments to IFRS reserving (111) (111) (130)
Tax adjustments 29 27 33
Revalue listed debt to market value (92) (51) (68)
Fair value adjustments1 - (2) -
Eliminate after tax pension scheme surpluses (including IFRIC 14 adjustments)2 (462) (258) (492)
Other adjustments3 (9) 5 (14)
MCEV net worth attributable to owners of the parent 465 243 466
MCEV value of in-force business included (net of tax) as set out in note 2 2,110 2,085 2,181
Closing Group MCEV 2,575 2,328 2,647
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 IFRIC 14 adjustments as described in
note 11 of the IFRS condensed consolidated interim financial statements.
3 Includes adjustments to revalue unlisted debt carried at amortised cost under IFRS at face value.
NOTES TO THE MCEV FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
OVERVIEW
The supplementary information on pages 61 to 73 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 the 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 (prior to its divestment on 1 July 2014) and management service companies' values are calculated
and presented on a basis consistent with IFRS. 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 holding companies at their IFRS net asset value.
In January 2015, the Group announced the successful exchange of 99% of the Group's Perpetual Reset Capital Securities
('Tier 1 notes') for £428 million of new listed subordinated notes issued by PGH Capital Limited and maturing in 2025. The
terms of the new notes meet the requirement of Tier 2 capital under Solvency II and have a coupon of 6.625%. Upon exchange,
new notes with a face value of £32 million were held by Group companies
On 29 June 2015, the Group and Life Company Consolidation Group ('LCCG') signed a disposal agreement under which LCCG
agreed to acquire the entire issued share capital of Scottish Mutual International Limited ('SMI') in return for gross cash
consideration of £14 million and a dividend payable by SMI prior to completion of the transaction. The disposal is expected
to be completed by the end of the year.
The Finance Act 2013 set the rate of corporation tax at 20% from April 2015. The Summer Budget 2015 introduced various
changes that, when substantively enacted, would impact the valuation of deferred tax in these financial statements. Further
reductions to the rate of corporation tax, to 19% in April 2017 and 18% from April 2020 have been announced and will be
introduced by future legislation. In addition, changes have been proposed that would impact the valuation of deferred tax
assets in relation to certain brought forward losses. The impact of these changes has not been reflected in the Group's
MCEV.
COVERED BUSINESS
The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis (prior to its
divestment on 1 July 2014) 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.
The VIF consists of the following components:
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')
COC 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 144% of the
Pillar 1 minimum regulatory capital requirement or 125% of the Pillar 2 minimum regulatory capital requirement (30 June
2014: 150% Pillar 1, 128% Pillar 2; 31 December 2014: 142% Pillar 1, 124% Pillar 2).
Solvency II introduces a new capital regime for insurers with effect from 1 January 2016. 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 £20 million (30 June 2014: £21 million; 31 December 2014:
£14 million).
For other business the cost would be £84 million (30 June 2014: £107 million; 31 December 2014: £105 million). This equates
to an equivalent average cost of capital charge of 0.87% (30 June 2014: 1.1%; 31 December 2014: 0.95%). 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 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 2015, the Group MCEV included £171 million in respect of these policies (30 June 2014: £133
million; 31 December 2014: £163 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 therefore excludes premiums of £164 million (30 June 2014: £201 million; 30 December
2014: £390 million) written in the period in respect of annuities with guaranteed terms.
Policies with guarantees are fully reserved for on an economic basis. To the extent fewer policyholders choose to take up
their guaranteed rates than we expect, there is potential for positive experience variances to benefit the MCEV.
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 anticipates that its ultimate contributions into the pension schemes will not give rise to an unrecoverable
surplus.
h) Events after the reporting period
On 19 August 2015, the Board declared an interim dividend of 26.7p per share (30 June 2014: 26.7p per share) for the half
year ended 30 June 2015. The cost of this dividend has not been recognised as a liability in the interim financial
statements for the period to 30 June 2015 and will be charged to the Reconciliation of Movement in Equity - Group MCEV
basis when paid.
2. COMPONENTS OF THE MCEV OF COVERED BUSINESS
Half year ended 30 June 2015 £m Half year ended 30 June 2014 £m Year ended 31 December 2014 £m
Net worth 740 748 675
PVFP 2,173 2,119 2,238
TVFOG (54) (27) (38)
COC (9) (7) (19)
Total VIF 2,110 2,085 2,181
2,850 2,833 2,856
The net worth of covered business of £740 million at 30 June 2015 (30 June 2014: £748 million; 31 December 2014: £675
million) consists of £315 million of free surplus in excess of required capital (30 June 2014: £379 million; 31 December
2014: £196 million).
3. ANALYSIS OF COVERED BUSINESS MCEV EARNINGS (AFTER TAX)
Half year ended 30 June 2015
Net worth £m VIF £m Total life MCEV £m
Life MCEV at 1 January 2015 675 2,181 2,856
New business value 1 1 2
Expected existing business contribution (reference rate)1 10 27 37
Expected existing business contribution (in excess of reference rate)2 - 20 20
Transfer from VIF to net worth 85 (85) -
Experience variances (2) (2) (4)
Assumption changes (9) (11) (20)
Other operating variances 26 10 36
Life MCEV operating earnings 111 (40) 71
Economic variances 13 (23) (10)
Other non-operating variances 8 3 11
Total Life MCEV earnings 132 (60) 72
Divested businesses - - -
Capital and dividend flows (67) (11) (78)
Life MCEV at 30 June 2015 740 2,110 2,850
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the
long-term risk-free rate at 2.29% (30 June 2014: 3.55%; 31 December 2014: 3.55%).
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 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) 15 44 59
Expected existing business contribution (in excess of reference rate) (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
Year ended 31 December 2014
Net worth £m VIF £m Total life MCEV £m
Life MCEV at 1 January 2014 802 2,257 3,059
New business value 7 4 11
Expected existing business contribution (reference rate) 31 79 110
Expected existing business contribution (in excess of reference rate) (8) 35 27
Transfer from VIF to net worth 179 (179) -
Experience variances 45 8 53
Assumption changes 20 (35) (15)
Other operating variances 71 11 82
Life MCEV operating earnings 345 (77) 268
Economic variances (28) 70 42
Other non-operating variances (34) (40) (74)
Total Life MCEV earnings 283 (47) 236
Divested business (18) - (18)
Capital and dividend flows (392) (29) (421)
Life MCEV at 31 December 2014 675 2,181 2,856
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 £m MCEV £m MCEV/ Premium %
Half year ended 30 June 2015 44 2 4%
Half year ended 30 June 2014 83 7 8%
Year ended 31 December 2014 154 11 7%
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 £m 6-10 £m 11-15 £m 16-20 £m 20+ £m Total £m
30 June 2015 831 550 378 241 173 2,173
30 June 2014 826 531 359 228 175 2,119
31 December 2014 859 556 387 250 186 2,238
6. ASSUMPTIONS
REFERENCE RATES
(a) Risk-free rates
Risk-free rates are based on the annually compounded UK Government bond nominal spot curve plus ten 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 2015 30 June 2014 31 December 2014
Term Gilt yield +10bps Swap yield Gilt yield +10bps Swap yield Gilt yield +10bps Swap yield
1 year 0.59% 0.73% 0.74% 0.82% 0.43% 0.98%
5 years 1.57% 1.61% 2.09% 2.21%
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