REG - Phoenix Grp Hldgs - 2017 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 2
24/08/2017 07:06
- Part 2: For the preceding part double click ID:nRSX8386Oa
GROUP COSTS
Group costs in the period were £11 million (HY16: £1 million). The increase in
costs compared to the prior period principally reflects a lower return on the
scheme surplus of the PGL Pension scheme following the buy-in transaction
entered into with Phoenix Life Limited in the second half of 2016.
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM
BUSINESS
The net adverse investment return variances and economic assumption changes on
long-term business of £56 million (HY16: £147 million adverse) primarily arise
on hedging positions held by the life funds following equity market gains in
the period. The Group's exposure to equity movements arising from future
with-profit bonuses and future unit-linked charges is hedged to benefit the
regulatory capital position. The impact of equity market movements on the
value of the hedging instruments is reflected in the IFRS results, but the
corresponding change in the value of future profits is not.
The HY16 loss included the impact of a significant fall in yields during the
period, which adversely impacted the life funds.
VARIANCE ON OWNERS' FUNDS
The adverse variance on owners' funds of £77 million (HY16: £130 million
positive) is principally driven by interest rate swaption positions held in
the life companies' shareholder funds. Such positions are held to hedge the
impact of interest rate risk on the Group's regulatory capital position. With
swap yields remaining relatively stable during the period, swap volatility has
decreased and the option value associated with these contracts has fallen.
The HY16 gain principally reflected the impact of falling yields on interest
rate hedging positions held by the life companies as at the end of June 2016.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES
Acquired in-force business and other intangibles of £2.7 billion were
recognised on the acquisition of the operating companies in 2009, and a
further £0.2 billion was recognised following the acquisitions of the AXA and
Abbey Life businesses in 2016. The acquired in-force business is being
amortised in line with the run-off of the life companies. Amortisation of
acquired in-force business during the period totalled £42 million (HY16: £33
million). Amortisation of other intangible assets totalled £8 million in the
period (HY16: £7 million).
other non-operating ITEMS
Other non-operating items of £82 million negative (HY16: £14 million negative)
include the £25 million premium paid on partial redemption of the Group's £300
million senior bonds, the £28 million impact of the agreement to reduce annual
charges on Workplace Pension products to 1% or lower, £18 million of
acquisition integration costs, an £8 million increase in the provision of
costs for claims relating to historic creditor insurance underwritten by a
subsidiary of the Group, PA (GI) Limited, and a net £3 million of other costs,
including corporate projects. The prior period result included a £14 million
gain following completion of data review procedures associated with the
reassurance of PLAL annuities in 2015 and a £3 million positive impact of a
pension increase exchange exercise in respect of the PGL Pension Scheme,
offset by the recognition of a £16 million cost of providing for PA (GI)
Limited creditor insurance claims, £12 million of corporate project costs and
a £3 million adverse impact of other one-off items.
FINANCE COSTS ATTRIBUTABLE TO OWNERS
Half year ended Half year
30 June 2017 ended
£m 30 June 2016
£m
Bank finance costs 8 12
Other finance costs 43 34
Finance costs attributable to owners 51 46
Finance costs have increased by £5 million, comprising a £4 million decrease
in bank finance costs and a £9 million increase in other finance costs. The
movements reflect the issuance of the Tier 3 bond during the first half of
2017 and subsequent repayment of bank debt, together with the impacts of the
acceleration of deferred issue cost recognition on bank and senior debt repaid
in the year.
TAX CREDIT ATTRIBUTABLE TO OWNERS
The Group's approach to the management of its tax affairs is set out in its
Tax Strategy document which is available in the corporate responsibility
section of the Group's website. The Group's tax affairs and tax controls are
managed by an in-house tax team who report on them to the Board and the Audit
Committee on a regular basis throughout the year. The Board believes that its
Tax Strategy accords with the Group's approach to its wider Corporate Social
Responsibility. In the first half of 2017, the new UK requirement for large UK
businesses to publish their tax strategy came into effect.
Implicit in the Group's Tax Strategy and the management of its tax affairs is
a desire for greater transparency and openness that will help the Group's
stakeholders better understand the published tax numbers. In this way the
Group aims to participate in a substantive manner with HMRC and other
insurance industry stakeholders on consultative documents and tax law changes
that potentially impact on the insurance sector.
All of the Group's insurance operations are based in the UK and are liable to
tax in accordance with applicable UK legislation. The Group derives a
de-minimis level of income from non-UK sources. Although Phoenix Group
Holdings is a Jersey resident holding company, a decision has been taken by
the Board to move its tax residence to the UK, planned during 2017. The
Company is currently subject to a 0% tax rate in Jersey but because its
primary source of income is its UK subsidiaries the tax residency of Phoenix
Group Holdings has a negligible impact on the UK tax payable by the Group.
The Group tax credit for the period attributable to owners is £5 million
(HY16: £13 million) based on a loss (after policyholder tax) of £(101) million
(HY16: £(10) million). The tax credit is different from the expected tax
credit (based on the UK corporation tax rate of 19.25%) of £19 million
primarily due to the impacts of current year tax losses not being recognised
and the treatment of certain expenses as non-deductible. See note 6 to the
IFRS interim financial statements for further analysis.
Risk management
"APPLICATION OF THE Group's Risk Management Framework HAS FACILITATED THE SAFE
INTEGRATION OF THE AXA AND ABBEY LIFE BUSINESSES."
Wayne Snow
Group Chief Risk Officer
Introduction
Our risk infrastructure has enabled the Group to integrate the acquired
businesses as well as continuing to deliver key strategic initiatives amidst a
volatile political and regulatory environment.
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 risks and take appropriate actions.
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 from equity and interest rate movements. The Group also maintains cash buffers in its holding companies to reduce reliance on emerging cash flows.The Group's excess capital position continues to be closely monitored and managed, particularly in the low interest environment. Despite the increased uncertainty on the terms of the UK's exit from the EU following the UK election result, equity markets have continued to rise. Yields on UK swap rates have also risen slightly over the first half of the year. Additional hedging carried out in 2016 remains in place to reduce the impact of interest rate volatility.The Group's financial strength has benefited from extension of the Internal Model to cover the AXA business and further Tier 2 and Tier 3 debt issuance in 2017.Recent currency volatility does not materially impact the Group.
appropriate levels of regulatory capital.Since the introduction of Solvency II and a swaps-based discount rate, the Group is
more sensitive to movements in swap yields.
Adverse changes in experience versus actuarial assumptions. The Group has liabilities under annuities and other policies that are sensitive to future longevity, persistency, and mortality The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions.The Group continues to actively manage its longevity risk exposures, which includes the use of reinsurance contracts to maintain this risk within appetite. The Group has noted the continuing trend of reductions in future mortality improvements and our assumptions amended to make an appropriate allowance for this.Policyholder persistency rates and the take-up of guarantees have been affected by the low interest rate environment.Assumptions have been strengthened where indicated by recent experience.
rates. For example, if our annuity policyholders live for longer than expected, then their benefits will be paid for longer. The
amount of additional capital required to meet those additional liabilities could have a material adverse impact on the Group's
ability to meet its cash flow targets.
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 exposures, counterparty credit rating, sector and geography.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. Counterparty exposures are now managed and monitored at a consolidated level across the enlarged Group.There have been no significant developments in counterparty exposures over the first half of 2017.
or perceived creditworthiness or default of issuers.This risk is reflected in the higher expected return, or spread, over less
risky assets.An increase in credit spreads on debt securities, particularly if it is accompanied by a higher level of actual or
expected issuer defaults, could adversely impact the value of the Group's assets.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.
Changes in the regulatory and legislative landscape. The conduct-focused regulator has a greater focus on customer outcomes. This may continue to challenge existing approaches The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape.The Group assesses the risks of regulatory change and the impact on our operations and lobbies where appropriate.Although not material in the context of the overall Group, we are exploring a range of options to ensure we can continue to service our Irish policyholders as part of Brexit contingency planning. Phoenix continues to roll out its customer model and risk management framework to the Abbey Life business. The FCA investigations remain ongoing. However, warranties and indemnities were agreed as part of the acquisition which mitigate against an adverse outcome.The risk of potentially adverse tax legislation being introduced in 2017 has reduced.Onshoring process continues (see page 5) and Group capital position was strengthened ahead of expiry of PGH waiver in respect of Group regulatory supervision at 30 June 2017. Capital position is now managed and reported at PGH level.
and/or may result in remediation exercises where Phoenix Life cannot demonstrate that it met the expected customer outcomes in
the eyes of the regulator.Changes in legislation such as the implications of Brexit can also impact the Group's financial
position.
The Group fails to effectively integrate the acquired businesses. The challenge of integrating two new businesses into the Group could introduce structural or operational inefficiencies that The financial and operational risks of target businesses were assessed as part of the acquisition phase.Integration plans are developed and resourced with appropriately skilled staff to ensure that the target operating models are delivered in line with expectations. Integration of both the acquired businesses is progressing, withrealised and expected benefits higher than planned.As noted above, the Group's Internal Model has been extended to includethe AXA business.A similar application for the Abbey Life business is on track to be made in Q4 2017.
results in Phoenix failing to generate the expected outcomes for policyholders or value for shareholders.
Greater than anticipated redress cost relating to creditor insurance. High Court ruling that PA (GI) Limited ('PAGI'), a Group company, retained liability in relation to creditor insurance The Group has processes in place to review complaints received, and where appropriate, provide redressto the policyholder.The Group continues to monitor thelevel of complaints and emerging experience to ensure that the provisions remain appropriate.The Group is considering options in respect of seeking to recover incurred costs from third parties. Claims handling capability established using industry specialists.FCA to launch two-year public awareness campaign in August ahead of 2019 deadline for mis-selling claims.Provision is maintained at £33m to reflect experience over the first half of 2017.
originally underwritten by PAGI.Cost of redress for these complaints may be greater than provisions held, due to uncertainties
with regard to the volumes of future complaints, the rates at which those complaints are upheld and the average redress value.
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 Description Risk Universe Category
Title
Political risk Unexpected changes in the legislative environment driven by the political agenda following the UK's decision to leave the European Union. Impacts on financial markets of Brexit developments and potentially unexpected results in elections in key European countries. Strategic
Market The impact of alternative providers in the market or those with more comprehensive digital propositions. Strategic
disruptors
Financials
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Board of Directors of Phoenix Group Holdings (as listed below) hereby
declares that, to the best of its knowledge:
- the condensed consolidated interim financial statements for the half
year ended 30 June 2017, 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 2017
and for the financial half year to which the Interim Report relates, as
required by DTR 4.2.7 of the Disclosure Guidance and Transparency Rules. 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, as required by DTR 4.2.8, 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.
By order of the Board
CLIVE BANNISTER JAMES
MCCONVILLE
GROUP CHIEF EXECUTIVE OFFICER GROUP FINANCE DIRECTOR
ST HELIER, JERSEY
23 August 2017
PHOENIX GROUP HOLDINGS BOARD OF DIRECTORS
CHAIRMAN
Henry Staunton
EXECUTIVE DIRECTORS
Clive Bannister
James McConville
NON-EXECUTIVE DIRECTORS
Alastair Barbour
Ian Cormack
Karen Green
Wendy Mayall
John Pollock
Nicholas Shott
Kory Sorenson
AUDITOR'S REVIEW REPORT
To: The Board of Directors of Phoenix Group Holdings
INTRODUCTION
We have been engaged by the Company to review the condensed set of financial
statements in the interim report for the six months ended 30 June 2017 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 30 to 54. We have read the other information contained
in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of financial statements.
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) 'Review of Interim Financial Information Performed by the Independent
Auditor of the Entity' issued by the Auditing Practices Board. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company, for our work, for this report, or for the conclusions
we have formed.
DIRECTORS' RESPONSIBILITIES
The interim report is the responsibility of, and has been approved by, the
Directors.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with International Financial Reporting Standards
('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 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 report
for the six months ended 30 June 2017 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 and the
Disclosure and Transparency Rules of the United Kingdom's Financial Conduct
Authority.
ERNST & YOUNG LLP
LONDON
23 AUGUST 2017
CONDENSED CONSOLIDATED INCOME STATEMENT
For the half year ended 30 June 2017
Notes Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended 31 Dec 2016
£m £m £m
Gross premiums written 563 449 999
Less: premiums ceded to reinsurers (76) (25) (75)
Net premiums written 487 424 924
Fees 63 36 88
Net investment income 2,394 4,450 6,361
Total revenue, net of reinsurance payable 2,944 4,910 7,373
Gain on transfer of business - - 52
Other operating income 1 16 20
Net income 2,945 4,926 7,445
Policyholder claims (1,987) (1,783) (3,726)
Less: reinsurance recoveries 207 218 456
Change in insurance contract liabilities 981 (2,727) (1,970)
Change in reinsurers' share of insurance contract liabilities (156) 36 (281)
Transfer (to)/from unallocated surplus (77) 32 4
Net policyholder claims and benefits incurred (1,032) (4,224) (5,517)
Change in investment contract liabilities (1,522) (277) (1,194)
Acquisition costs (3) (3) (9)
Change in present value of future profits 7 (5) (11)
Amortisation of acquired in-force business (46) (38) (76)
Amortisation of other intangibles (8) (7) (14)
Administrative expenses (321) (225) (506)
Net income attributable to unitholders (25) (25) (66)
Total operating expenses (2,950) (4,804) (7,393)
(Loss)/profit before finance costs and tax (5) 122 52
Finance costs (64) (62) (122)
(Loss)/profit for the period before tax (69) 60 (70)
Tax charge attributable to policyholders' returns 6 (32) (70) (58)
Loss before the tax attributable to owners (101) (10) (128)
Tax charge 6 (27) (57) (30)
Add: tax attributable to policyholders' returns 6 32 70 58
Tax credit attributable to owners 6 5 13 28
(Loss)/profit for the period attributable to owners (96) 3 (100)
Attributable to:
Owners of the parent (96) 2 (101)
Non-controlling interests - 1 1
(96) 3 (100)
Earnings per share
Basic (pence per share) 7 (24.5)p 0.1p* (34.3)p*
Diluted (pence per share) 7 (24.5)p 0.1p* (34.3)p*
*Restated following rights issue. See note 7 to the condensed consolidated
interim financial statements.
CONDENSED STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
For the half year ended 30 June 2017
Notes Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended 31 Dec 2016
£m £m £m
(Loss)/profit for the year (96) 3 (100)
Other comprehensive income/(expense):
Items that will not be reclassified to profit or loss:
Owner-occupied property revaluation gains 1 - -
Remeasurements of net defined benefit asset 42 239 219
Tax credit/(charge) relating to other comprehensive income items 6 1 (1) (1)
Total other comprehensive income for the period 44 238 218
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