REG - Phoenix Grp Hldgs - 2017 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 4
24/08/2017 07:06
- Part 4: For the preceding part double click ID:nRSX8386Oc
107
Investment return variances and economic assumption changes on long-term business (147) - (147)
Variance on owners' funds 102 28 130
Amortisation of acquired in-force business (33) - (33)
Amortisation of other intangibles (7) - (7)
Other non-operating items (6) (8) (14)
Financing costs attributable to owners (12) (34) (46)
Segment result before the tax attributable to owners 5 (15) (10)
Other non-operating items include:
- a gain of £14 million arising as a result of a premium adjustment on
the reassurance arrangement with RGA International following completion of a
data review;
- positive impact of pension increase exchange exercise of £3 million in
respect of PGL pension scheme;
- the costs of providing for claims relating to creditor insurance
underwritten prior to 2016 by a subsidiary of the Group, PA(GI) Limited, of
£16 million;
- corporate project costs of £12 million; and
- net other one-off items totalling a cost of £3 million.
Year ended 31 December 2016
Phoenix Unallocated Total
Life Group £m
£m £m
Operating profit/(loss) 357 (6) 351
Investment return variances and economic assumption changes on long-term business (207) - (207)
Variance on owners' funds 11 (16) (5)
Amortisation of acquired in-force business (68) - (68)
Amortisation of other intangibles (14) - (14)
Other non-operating items (15) (80) (95)
Finance costs attributable to owners (24) (66) (90)
Segment result before the tax attributable to owners 40 (168) (128)
Other non-operating items include:
- a gain of £26 million on the implementation of a longevity swap
reassurance contract on a portfolio of the Group's annuities;
- a gain of £14 million arising as a result of a premium adjustment on
the 2015 reassurance arrangement with RGA International following completion
of a data review;
- acquisition related costs of £31 million, comprising £12 million of
transaction costs related to the acquisition of AXA Wealth's pensions and
protection business and £19 million of transaction costs related to
acquisition of Abbey Life;
- a provision for costs of £30 million associated with the integration
and restructuring of the acquired AXA businesses;
- the costs of providing for claims and associated costs relating to
creditor insurance underwritten prior to 2016 by a subsidiary of the Group,
PA(GI) Limited ('PA(GI)'), of £33 million;
- recognition of costs of £10 million associated with the introduction of
regulations that cap early exit charges for pension customers aged over 55 at
1%, which will come into force from 2017;
- costs of £6 million associated with the transfer of non-profit
annuities from with-profit funds to non-profit matching adjustment funds;
- the costs of £4 million on PGL Pension Scheme buy-in;
- other corporate project costs of £19 million; and
- net other one-off items totalling a cost of £2 million.
5. INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES
The long-term nature of much of the Group's operations means that, for
internal performance management, the effects of short-term economic volatility
are treated as non-operating items. The Group focuses instead on an operating
profit measure that incorporates an expected return on investments supporting
its long-term business. The methodology for the determination of the expected
investment return is explained below together with an analysis of investment
return variances and economic assumption changes recognised outside of
operating profit.
5.1 CALCULATION OF THE LONG-TERM INVESTMENT RETURN
The expected return on investments for both owner and policyholder funds is
based on opening economic assumptions applied to the funds under management at
the beginning of the reporting period. Expected investment return assumptions
are derived actively, based on market yields on risk-free fixed interest
assets at the start of each financial year.
The long-term risk-free rate used as a basis for deriving the long-term
investment return is set by reference to the swap curve at the 15 year
duration plus 10bps at the start of the year. A risk premium of 350bps is
added to the risk-free yield for equities (30 June 2016 and 31 December 2016:
350bps), 250bps for properties (30 June 2016 and 31 December 2016: 250bps),
150bps for other fixed interest assets (30 June 2016 and 31 December 2016:
150bps) and 50bps for gilts (30 June 2016 and 31 December 2016: 50bps).
The principal assumptions underlying the calculation of the long-term
investment return are:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
% % 31 Dec 2016
%
Equities 5.0 5.8 5.8
Properties 4.0 4.8 4.8
Gilts 2.0 2.8 2.8
Other fixed interest 3.0 3.8 3.8
5.2 Life assurance business
Operating profit for life assurance business is based on expected investment
returns on financial investments backing owners' and policyholder funds over
the reporting period, with consistent allowance for the corresponding expected
movements in liabilities. Operating profit includes the effect of variance in
experience for non-economic items, for example mortality, persistency and
expenses, and the effect of changes in non-economic assumptions. Changes due
to economic items, for example market value movements and interest rate
changes, which give rise to variances between actual and expected investment
returns, and the impact of changes in economic assumptions on liabilities, are
disclosed separately outside operating profit.
The movement in liabilities included in operating profit reflects both the
change in liabilities due to the expected return on investments and the impact
of experience variances and assumption changes for non-economic items.
The effect of differences between actual and expected economic experience on
liabilities, and changes to economic assumptions used to value liabilities,
are taken outside operating profit. For many types of long-term business,
including unit-linked and with-profit funds, movements in asset values are
offset by corresponding changes in liabilities, limiting the net impact on
profit. For other long-term business the profit impact of economic volatility
depends on the degree of matching of assets and liabilities, and exposure to
financial options and guarantees.
The investment variances and economic assumption changes excluded from the
long-term business operating profit are as follows:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
£m £m 31 Dec 2016
£m
Investment return variances and economic assumption changes on long-term business (56) (147) (207)
Negative investment return variances and economic assumption changes on
long-term business of £56 million in the first half of 2017 (half year ended
30 June 2016: negative £147 million; year ended 31 December 2016: negative
£207 million) principally arose as a result of losses arising on equity
hedging positions held by the life funds following equity market gains in the
period. The Group's hedging programme remains optimised to the Solvency II
regulatory capital position.
5.3 Owners' funds
For non-long-term business including owners' funds, the total investment
income, including fair value gains, is analysed between a calculated
longer-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners' funds are
as follows:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
£m £m 31 Dec 2016
£m
Variances on owners' funds of subsidiary undertakings (77) 130 (5)
The negative variance on owners' funds of subsidiary undertakings of £77
million (30 June 2016: positive £130 million; 31 December 2016: negative £5
million) is principally driven by interest rate swaption positions held in the
life companies' shareholder funds to hedge the impact of interest rate risk on
the Group's Solvency II 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.
6. TAX CHARGE/(CREDIT)
6.1 CURRENT PERIOD TAX CHARGE/(CREDIT)
Half year ended 30 Jun 2017 Half year ended 30 Jun 2016 Year ended 31 Dec 2016
£m £m £m
Current tax:
UK corporation tax 18 63 46
Overseas tax 12 - 15
30 63 61
Adjustment in respect of prior years 1 (5) (8)
Total current tax charge 31 58 53
Deferred tax:
Origination and reversal of temporary differences (5) (2) (13)
Change in the rate of UK corporation tax 1 1 (10)
Total deferred tax credit (4) (1) (23)
Total tax charge 27 57 30
Attributable to:
- policyholders 32 70 58
- owners (5) (13) (28)
Total tax charge 27 57 30
The Group, as a proxy for policyholders in the UK, is required to pay taxes on
investment income and gains each year. Accordingly, the tax credit or charge
attributable to UK life assurance policyholder earnings is included in income
tax expense. The tax charge attributable to policyholder earnings was £32
million (half year ended 30 June 2016: £70 million; year ended 31 December
2016: £58 million).
6.2 TAX (CREDITED)/CHARGED TO OTHER COMPREHENSIVE INCOME
Half year ended 30 Jun 2017 Half year ended 30 Jun 2016 Year ended
£m £m 31 Dec 2016
£m
Current tax credit on share schemes - - (1)
Deferred tax (credit)/charge on defined benefit schemes (1) 1 3
Deferred tax credit on share schemes - - (1)
(1) 1 1
6.3 RECONCILIATION OF TAX CHARGE
Half year ended 30 Jun 2017 Half year ended 30 Jun 2016 Year ended 31 Dec 2016
£m £m £m
(Loss)/profit before tax (69) 60 (70)
Policyholder tax charge (32) (70) (58)
Loss before the tax attributable to owners (101) (10) (128)
Tax charge at standard UK1 rate of 19.25% (30 June 2016: 20%; 31 December 2016: 20%) (19) (2) (26)
Non-taxable income, gains and losses2 (3) (6) (10)
Disallowable deductions3 5 7 24
Prior year tax credit for shareholders4 (7) (2) (6)
Movement on acquired in-force amortisation at less than 19.25% 1 - 2
(30 June 2016: 20%; 31 December 2016: 20%)
Profits taxed at rates other than 19.25%5 (30 June 2016: 20%; 31 December 2016: 20%) 4 (4) -
Recognition of previously unrecognised deferred tax assets6 - (7) (5)
Deferred tax rate change7 2 1 (9)
Temporary differences not valued8 10 - -
Other 2 - 2
Owners' tax credit (5) (13) (28)
Policyholder tax charge 32 70 58
Total tax charge for the period 27 57 30
1 The Phoenix Life reportable segment operates predominately in the UK.
The reconciliation of the tax charge/(credit) has therefore been completed by
reference to the standard rate of UK tax rather than by reference to the
Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
2 Includes non-taxable dividends and gains and non-taxable pension scheme
items.
3 Includes non-recurring disallowable deductions in relation to claims
and other costs relating to creditor insurance underwritten by PA(GI) Limited,
and a consolidation adjustment on the PGL Pension Scheme 'buy-in' agreement.
4 The prior year credit mainly relates to the reassessment of a deferred
tax asset.
5 Mainly represents losses recognised at marginal rates (30 June 2016:
£nil). The half year ended 30 June 2016 included a one-off tax rate difference
on transitional adjustments of negative £3 million.
6. The half year ended 30 June 2016 includes initial recognition of £4
million deferred tax assets in Pearl Group Management Services Limited and £3
million in Phoenix Life Assurance Limited.
7 Represents the reduction in future tax rates on deferred tax assets.
8 Represents current year losses of £11 million carried forward and the
use of brought forward unrecognised losses of negative £1 million.
The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in
April 2017 and to 17% from April 2020. Consequently, a blended rate of tax has
been used for the purposes of providing for deferred tax in these financial
statements.
Deferred income tax assets are recognised for tax losses carried forward only
to the extent that realisation of the related tax benefit is probable.
Half year ended 30 Jun 2017 Half year ended 30 Jun 2016 Year ended
£m £m 31 Dec 2016
£m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 31 17 25
Excess expenses and deferred acquisition costs 33 - 33
Provisions and other temporary differences 3 - 3
Deferred tax assets not recognised on capital losses9 15 87 18
9 These can only be recognised against future capital gains and have no
expiry date.
On 29 March 2017, the UK Government triggered Article 50 initiating a two year
process for leaving the EU. There is some uncertainty about how the existing
tax legislation will apply after the UK's exit. No changes are required to the
measurement of tax in these financial statements but this will be monitored
and reassessed at each reporting period as negotiations continue.
7. Earnings per share
The Group calculates its basic earnings per share based on the present shares
in issue using the earnings attributable to ordinary equity holders of the
parent, divided by the weighted average number of ordinary shares in issue
during the period.
Diluted earnings per share are calculated based on the potential future shares
in issue assuming the conversion of all potentially dilutive ordinary shares.
The weighted average number of ordinary shares in issue is adjusted to assume
conversion of dilutive share awards granted to employees and warrants.
Following completion of the rights issue in November 2016, the earnings per
share calculations for all periods up to the date the rights issue shares were
issued have been adjusted for the bonus element of the rights issue. The bonus
factor used was 1.18.
7.1 BASIC EARNINGS PER SHARE
The result attributable to owners of the parent for the purposes of computing
earnings per share has been calculated as set out below. This is after
adjusting for the result attributable to non-controlling interests.
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
£m £m 31 Dec 2016
£m
(Loss)/profit for the period (96) 3 (100)
Share of result attributable to non-controlling interests - (1) (1)
(Loss)/profit attributable to owners of the parent (96) 2 (101)
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
Number Number 31 Dec 2016
million million Number
million
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue) 393 266 266
Effect of ordinary shares issued - 4 30
Own shares held by employee benefit trust (1) (1) (1)
Weighted average number of ordinary shares 392 269 295
Basic earnings per share is as follows:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
pence pence 31 Dec 2016
pence
Basic earnings per share (restated for bonus element of rights issue) (24.5) 0.1 (34.3)
7.2 Diluted earnings per share
The result attributable to owners of the parent used in the calculation of
diluted earnings per share is the same as that used in the basic earnings per
share calculation in note 7.1 above. The diluted weighted average number of
ordinary shares outstanding during the period is also the same as that used in
the basic earnings per share calculation in note 7.1 above. As losses have an
anti-dilutive effect, none of the share-based awards have a dilutive effect
for the half year ended 30 June 2017 and for the year ended 31 December 2016.
The Group's deferred bonus share schemes and sharesave share-based schemes
increased the weighted average number of shares on a diluted basis by 373,129
for the half year ended 30 June 2016.
Diluted earnings per share is as follows:
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
pence pence 31 Dec 2016
pence
Diluted earnings per share (restated for bonus element of rights issue) (24.5) 0.1 (34.3)
5 million warrants issued on 2 September 2009 to certain entities providing
finance to the Group could potentially dilute basic earnings per share in the
future. The warrants do not have a dilutive effect for the periods presented
due to the exercise price being significantly higher than the share price of
the Company.
8. DIVIDENDS ON ORDINARY SHARES
Half year ended 30 June 2017 Half year ended 30 June 2016 Year ended
£m £m 31 Dec 2016
£m
Dividends declared and paid 94 60 126
On 17 March 2017, the Board recommended a dividend of 23.9p per share in
respect of the year ended 31 December 2016. The dividend was approved at the
Company's Annual General Meeting, which was held on 11 May 2017. The dividend
amounted to £94 million and was paid on 15 May 2017.
9. Share Capital
30 June 2017 30 June 2016 31 Dec 2016
£ £ £
Authorised:
410 million (30 June 2016: 410 million; 31 December 2016: 410 million) 31,750 31,750 31,750
ordinary shares of E0.0001 each
Issued and fully paid:
393.1 million (30 June 2016: 248.1 million; 31 December 2016: 392.8 million) 33,137 20,219 33,112
ordinary shares of E0.0001 each
The value of the authorised share capital was translated at a historical rate.
Issued and fully paid share capital transactions are translated at the rate
prevailing at the date of issue.
Movements in share capital during the period:
Number £
Shares in issue at 1 January 2017 392,849,817 33,112
Other ordinary shares issued in the period 285,025 25
Shares in issue at 30 June 2017 393,134,842 33,137
During the year, the Company issued 285,025 shares at a total premium of £1
million in order to satisfy its obligation to employees under the Group's
sharesave schemes.
Number £
Shares in issue at 1 January 2016 225,419,446 18,463
Placement of ordinary shares 22,542,000 1,748
Other ordinary shares issued in the period 103,528 8
Shares in issue at 30 June 2016 248,064,974 20,219
Ordinary shares issued under the rights issue 144,727,282 12,888
Other ordinary shares issued in the period 57,561 5
Shares in issue at 31 December 2016 392,849,817 33,112
On 1 June 2016, the Group completed an equity placing of 22,542,000 new
ordinary shares in association with the proposed acquisition of the AXA
businesses which raised gross proceeds of £194 million. The proceeds from the
equity placing, net of deduction of commissions and expenses, were £190
million.
On 9 November 2016, the Group issued 144,727,282 shares following a rights
issue undertaken in connection with the proposed acquisition of Abbey Life,
where 7 rights issue shares were issued at 508p per share for every 12
existing Phoenix Group Holdings shares held. The rights issue raised gross
proceeds of £735 million and proceeds, net of deduction of commission and
expenses, were £717 million.
During 2016, the Company also issued 161,089 shares at a premium of £1 million
in order to satisfy its obligations to employees under the Group's sharesave
schemes.
10. PENSION SCHEMES
The condensed statement of consolidated financial position incorporates the
pension scheme assets and liabilities of the PGL Pension Scheme, the Pearl
Group Staff Pension Scheme and the Abbey Life Staff Pension Scheme as at 30
June 2017.
In December 2016, the PGL Pension Scheme entered into a 'buy-in' agreement
with PLL, which converted the existing longevity swap contract into a bulk
annuity contract, covering both longevity and investment risk. The Scheme
transferred £1,164 million of plan assets to a collateral account over which
PLL has a fixed charge. The transfer of the assets constituted the payment of
the premium to PLL and a simultaneous deposit of collateral by PLL, and was
net of a £23 million prepayment by PLL to the scheme in respect of benefits up
to 31 May 2017. The assets transferred to PLL are recognised in the relevant
line within financial assets in the condensed statement of consolidated
financial position. An adjustment of £6 million to the value of the premium
was paid by PLL to the PGL Scheme in 2017. The economic effect of the 'buy-in'
transaction in the Scheme is to replace the plan assets transferred with a
single line insurance policy reimbursement asset which is eliminated on
consolidation.
The economic surplus of the PGL Pension Scheme amounted to £495 million (30
June 2016: £828 million; 31 December 2016: £465 million). The carrying value
of insurance policies effected by the PGL Pension Scheme with the Group of
£916 million (30 June 2016: £21 million; 31 December 2016: £919 million) are
eliminated on consolidation and a deduction is made for the provision of tax
on that part of the economic surplus available as a refund on a winding-up of
the scheme and also in relation to the irrecoverable amount of the minimum
funding requirement obligations. The resulting net pension scheme liability of
the PGL scheme amounted to £568 million (30 June 2016: £536 million asset; 31
December 2016: £593 million liability).
The pension scheme asset of the Pearl Group Staff Pension Scheme amounted to
£280 million (30 June 2016: £227 million; 31 December 2016: £225 million).
Pension scheme assets are stated after deduction of the provision for tax on
that part of the economic surplus available as a refund on a winding-up of the
scheme and after adjusting for the irrecoverable amount of minimum funding
requirement obligations.
The pension scheme liability of the Abbey Life Staff Pension Scheme amounted
to £90 million (31 December 2016: £87 million). On 30 June 2017, the Abbey
Life Staff Pension Scheme was transferred from Abbey Life to Pearl Life
Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the Scheme
covenant together with all obligations of the Scheme following implementation
of the transfer. A revised schedule of contributions has been agreed,
effective from 1 July 2017, for PeLHL to pay the following amounts:
- a lump sum of £25 million into the Scheme settled on 31 July 2017;
- fixed monthly contributions of £400,000 and additional monthly
contributions of £83,552 in respect of administration expenses which will
increase annually in line with the Retail Prices Index assumption; and
- annual payments of £4 million into the 2016 Charged Account by 31 July
each year, with the first payment being made on 31 July 2017, and the last
payment due by 31 July 2025.
11. LIABILITIES UNDER INSURANCE CONTRACTS - ASSUMPTIONS
11.1 VALUATION OF PARTICIPATING INSURANCE AND INVESTMENT CONTRACTS
For participating business, which is with-profit business (insurance and
investment contracts), the insurance contract liability is calculated on a
realistic basis, adjusted to exclude the shareholders' share of future bonuses
and the associated tax liability. This is a market consistent valuation, which
involves placing a value on liabilities similar to the market value of assets
with similar cash flow patterns.
11.2 VALUATION OF NON-PARTICIPATING INSURANCE CONTRACTS
The non-participating insurance contract liabilities are determined using
either a net premium or gross premium valuation method.
11.3 PROCESS USED TO DETERMINE ASSUMPTIONS
In determining the discount rate to be applied when calculating participating
and non-participating insurance contract liabilities, the Group uses a
risk-free reference curve based on a swap curve with a liquidity premium of
10bps. For non-participating business only, the Group makes an explicit
adjustment to the risk-free rate to adjust for illiquidity in respect of
assets backing illiquid liabilities.
For participating insurance business the assumptions about future demographic
trends are intended to be best estimates. They are determined after
considering the companies' recent experience and/or relevant industry data.
Economic assumptions are market consistent.
For non-participating insurance business, demographic assumptions are derived
by setting assumptions at management's best estimates and recognising an
explicit margin for demographic risks.
During the period, a number of changes were made to assumptions to reflect
changes in expected experience. The impact of the more significant changes
that impacted the result attributable to owners during the period was as
follows:
(Decrease)/ (Decrease)/ (Decrease)/
increase in insurance liabilities increase in insurance increase in insurance
30 Jun 2017 liabilities liabilities
£m 30 Jun 2016 31 Dec 2016
£m £m
Change in longevity assumptions (126) (15) (83)
Change in persistency assumptions 75 - 142
Change in mortality assumptions 25 - 1
Change in other demographic assumptions (2) 16 (35)
Change in expenses assumptions (69) - (8)
12. BORROWINGS
30 Jun 2017 30 Jun 2016 31 Dec 2016
£m £m £m
Carrying value
Limited recourse bonds 2022 7.59% 67 67 65
Property reversions loan 168 186 183
Retrocession contracts 65 - 87
Total policyholder borrowings 300 253 335
£200 million 7.25% unsecured subordinated loan 172 163 167
£300 million senior unsecured bond 121 298 298
£428 million subordinated notes 425 393 393
£650 million unsecured revolving credit facility - 641 -
£900 million unsecured revolving credit facility 545 - 843
£450 million Tier 3 subordinated notes 448 - -
Total shareholder borrowings 1,711 1,495 1,701
Total borrowings 2,011 1,748 2,036
On 20 January 2017, PGH Capital plc ('PGHC') issued £300 million of Tier 3
subordinated notes due 2022 at a coupon of 4.125%. The proceeds from the bond
issuance were used to repay £300 million of the £900 million unsecured
revolving credit facility.
On 27 January 2017, £17 million of the £428 million subordinated notes held by
Group companies were sold to third parties and a further £15 million were sold
to third parties on 31 January 2017, thereby increasing external borrowings by
£32 million. As at 30 June 2017, internal holdings in the £428 million
subordinated notes were £nil (31 December 2016: £32 million).
On 28 February 2017, PGH became an additional borrower under the £900 million
unsecured revolving credit facility. On 20 March 2017, PGHC repaid its
outstanding borrowings under the facility of £550 million, whilst PGH drew
down an equivalent amount.
On 20 March 2017, PGH was substituted in place of PGHC as issuer of the £300
million senior bond, the £428 million subordinated notes and the £300 million
Tier 3 subordinated notes ('Substitutions').
On 5 May 2017, PGH completed the purchase of £178 million of the £300 million
senior bond at a premium of £25 million in excess of the principal amount.
Accrued interest on the purchased bonds was settled on this date. At 30 June
2017, £122 million in aggregate of the principal amount of the bonds remained
outstanding.
On 5 May 2017, PGH also completed the issue of a further £150 million of Tier
3 subordinated notes, the terms of which are the same as the Tier 3
subordinated notes issued in January 2017.
Changes to the Group's borrowings since 30 June 2017 have been disclosed in
note 17.
13. FINANCIAL INSTRUMENTS
13.1 FAIR VALUES
The table below sets out a comparison of the carrying amounts and fair values
of financial instruments.
Financial assets
30 Jun 2017 30 Jun 2016 31 Dec 2016
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
£m £m £m £m £m £m
Financial assets at fair value through profit or loss:
Held for trading - derivatives 2,608 2,608 3,881 3,881 3,003 3,003
Designated upon initial recognition:
Loans and receivables 932 932 331 331 812 812
Equities 17,816 17,816 12,322 12,322 17,759 17,759
Investment in associate 573 573 458 458 525 525
Fixed and variable rate income securities 29,253 29,253 34,028 34,028 29,290 29,290
Collective investment schemes 17,964 17,964 3,312 3,312 18,432 18,432
Reinsurers' share of investment contract liabilities 6,606 6,606 - - 6,808 6,808
Financial assets measured at amortised cost:
Loans and receivables 395 395 597 597 420 420
76,147 76,147 54,929 54,929 77,049 77,049
Financial liabilities
30 Jun 2017 30 Jun 2016 31 Dec 2016
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
£m £m £m £m £m £m
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,425 1,425 1,780 1,780 1,567 1,567
Designated upon initial recognition:
Borrowings 233 233 186 186 270 270
Net asset value attributable to unitholders 1,083 1,083 6,499 6,499 1,040 1,040
Investment contract liabilities 27,392 27,392 7,867 7,867 27,332 27,332
Financial liabilities measured at amortised cost:
Borrowings 1,778 1,940 1,562 1,629 1,766 1,879
Deposits received from reinsurers 374 374 414 414 392 392
Obligations for repayment of collateral received1 1,522 - 2,064 - 1,623 -
33,807 32,447 20,372 18,375 33,990 32,480
1 These liabilities have no expected settlement date. As the obligations
relate to the repayment of collateral received in the form of cash, the
liability is stated at the value of the consideration received and therefore
no fair value has been disclosed.
13.2 FAIR VALUE HIERARCHY
13.2.1 Determination of fair value and fair value hierarchy of financial
instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as
exchange traded securities and derivatives) is based on quoted market prices
at the period end provided by recognised pricing services. Market depth and
bid-ask spreads are used to corroborate whether an active market exists for an
instrument. Greater depth and narrower bid-ask spread indicates a higher
liquidity in the instrument and are classed as Level 1 inputs. For collective
investment schemes, fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider
bid-ask spreads which do not meet the classification as Level 1 inputs, are
classified as Level 2. The fair values of financial instruments not traded in
active markets are determined using broker quotes or valuation techniques with
observable market inputs. Financial instruments valued using broker quotes are
classified at Level 2, only where there is a sufficient range of available
quotes. The fair value of unquoted equities, over-the-counter derivatives,
loans and deposits and collective investment schemes, where published bid
prices are not available, are estimated using pricing models or discounted
cash flow techniques. Where pricing models are used, inputs are based on
market related data at the period end. Where discounted cash flows are used,
estimated future cash flows are based on management's best estimates and the
discount rate used is a market related rate for a similar instrument.
Level 3 financial instruments
The Group's financial instruments determined by valuation techniques using
non-observable market inputs are based on a combination of independent third
party evidence and internally developed models. In relation to investments in
hedge funds and private equity investments, non-observable third party
evidence in the form of net asset valuation statements are used as the basis
for the valuation. Adjustments may be made to the net asset valuation where
other evidence, for example recent sales of the underlying investments in the
fund, indicates this is required. Securities that are valued using broker
quotes which could not be corroborated across a sufficient range of quotes are
considered as Level 3. For a small number of investment vehicles and debt
securities, standard valuation models are used, as due to their nature and
complexity they have no external market. Inputs into such models are based on
observable market data where applicable. The fair value of loans, derivatives
and some borrowings with no external market is determined by internally
developed discounted cash flow models using appropriate assumptions
corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring
basis, the Group determines whether transfers have occurred between levels in
the hierarchy by re-assessing categorisation (based on the lowest level input
that is significant to the fair value measurement as a whole) at the start of
each reporting period.
13.2.2 Fair value hierarchy of financial instruments measured at fair value
At 30 June 2017
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial assets measured at fair value
Derivatives 52 2,511 45 2,608
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - - 932 932
Equities 17,175 10 631 17,816
Investment in associate 573 - - 573
Fixed and variable rate income securities 18,731 10,315 207 29,253
Collective investment schemes 13,232 4,653 79 17,964
Reinsurers' share of investment contract liabilities - 6,606 - 6,606
49,711 21,584 1,849 73,144
Total financial assets at fair value 49,763 24,095 1,894 75,752
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial liabilities measured at fair value
Derivatives 14 1,155 256 1,425
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings - - 233 233
Investment contract liabilities - 27,392 - 27,392
Net asset value attributable to unitholders 1,083 - - 1,083
1,083 27,392 233 28,708
Total financial liabilities at fair value 1,097 28,547 489 30,133
At 30 June 2016
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial assets measured at fair value
Derivatives 30 3,851 - 3,881
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - - 331 331
Equities 11,602 74 646 12,322
Investment in associate 458 - - 458
Fixed and variable rate income securities 19,772 14,013 243 34,028
Collective investment schemes 2,727 499 86 3,312
34,559 14,586 1,306 50,451
Total financial assets at fair value 34,589 18,437 1,306 54,332
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial liabilities measured at fair value
Derivatives 38 1,742 - 1,780
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings - - 186 186
Investment contract liabilities - 7,867 - 7,867
Net asset value attributable to unitholders 6,499 - - 6,499
6,499 7,867 186 14,552
Total financial liabilities at fair value 6,537 9,609 186 16,332
At 31 December 2016
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial assets measured at fair value
Derivatives 74 2,876 53 3,003
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - - 812 812
Equities 17,078 10 671 17,759
Investment in associate 525 - - 525
Fixed and variable rate income securities 17,282 11,862 146 29,290
Collective investment schemes 13,548 4,795 89 18,432
Reinsurers' share of investment contract liabilities - 6,808 - 6,808
48,433 23,475 1,718 73,626
Total financial assets at fair value 48,507 26,351 1,771 76,629
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial liabilities at fair value
Derivatives 25 1,270 272 1,567
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings - - 270 270
Investment contract liabilities - 27,332 - 27,332
Net asset value attributable to unitholders 1,040 - - 1,040
1,040 27,332 270 28,642
Total financial liabilities at fair value 1,065 28,602 542 30,209
13.2.3 Level 3 financial instrument sensitivities
Level 3 investments in equities
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