REG - Phoenix Grp Hldgs - 2017 Interim Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 5
24/08/2017 07:06
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(including private equity and unlisted
property investment vehicles) and collective investment schemes (including
hedge funds) are valued using net asset statements provided by independent
third parties, and therefore no sensitivity analysis has been prepared.
Fixed and variable rate securities categorised as Level 3 investments, with
the exception of a property investment structure and certain local authority
loans, are valued using broker quotes. Although such valuations are sensitive
to estimates, it is believed that changing one or more of the assumptions to
reasonably possible alternative assumptions would not change the fair value
significantly.
Level 3 investments in equities and fixed and variable rate income securities
include equity and debt holdings in a property investment structure with a
value of £1 million (30 June 2016: £24 million; 31 December 2016: £22 million)
and £43 million (30 June 2016: £17 million; 31 December 2016: £22 million)
respectively.
During the period, the investment was restructured affecting the weighting
between the Group's debt and equity holdings and prompting an amendment to the
valuation methodology. The valuation is now performed for the structure as a
whole on a discounted cash flow basis and allocated to the debt and equity
components in order of priority. The valuation is sensitive to the discount
rate applied. A decrease in the discount rate of 100bps would decrease the
value by £7 million whilst an increase of 200bps would increase the value by
£4 million. Due to the restructuring of the investment in the period, no
comparative sensitivities have been disclosed.
Also included within fixed and variable rate income securities are investments
in local authority loans. These investments are valued using a calculation
model that takes a comparable UK Treasury stock and applies a credit spread to
reflect reduced liquidity. The credit spread is derived from a sample broker
quote. The valuations are sensitive to movements in this spread. An increase
of 25bps would decrease the value by £1 million (30 June 2016: £1 million; 31
December 2016: £1 million) and a decrease of 25bps would increase the value by
£1 million (30 June 2016: £1 million; 31 December 2016: £nil).
Included within loans and receivables are investments in equity release
mortgages with a value of £539 million (30 June 2016: £331 million; 31
December 2016: £433 million). The loans are valued using a discounted cash
flow model, the key inputs to which include demographic assumptions, economic
assumptions (including house price index) and the use of a Black-Scholes model
for valuation of the no-negative equity guarantee. The no-negative equity
guarantee caps the loan repayment in the event of death or entry into
long-term care to be no greater than the sales proceeds from the property. The
significant sensitivities arise from movements in the yield curve, inflation
rate and house prices.
An increase of 100bps in the yield curve would decrease the value by £55
million (30 June 2016: £30 million; 31 December 2016: £42 million) and a
decrease of 100bps would increase the value by £63 million (30 June 2016: £35
million; 31 December 2016: £47 million). An increase of 1% in the inflation
rate would increase the value by £2 million (30 June 2016: £3 million; 31
December 2016: £2 million) and a decrease of 1% would decrease the value by £6
million (30 June 2016: £4 million; 31 December 2016: £5 million).
An increase of 10% in house prices would increase the value by £1 million (30
June 2016: £4 million; 31 December 2016: £1 million) and a decrease of 10%
would decrease the value by £3 million (30 June 2016: £2 million; 31 December
2016: £3 million).
Also included within loans and receivables are investments in commercial real
estate loans of £46 million entered into during the period. The loans are
valued using a model which discounts the expected projected future cash flows
at the risk-free rate plus a spread derived from a proxy basket of asset
backed securitites. The valuation is sensitive to changes in the discount
rate. An increase of 100bps in the discount rate would decrease the value by
£2 million and a decrease of 100bps would increase the value by £3 million.
Included within borrowings measured at fair value and categorised as Level 3
financial liabilities are property reversion loans with a value of £168
million (30 June 2016: £186 million; 31 December 2016: £183 million), measured
using an internally developed model. The valuation is sensitive to key
assumptions of the discount rate and the house price inflation rate. An
increase in the discount rate of 1% would decrease the value by £5 million (30
June 2016: £5 million; 31 December 2016: £5 million) and a decrease of 1%
would increase the value by £5 million (30 June 2016: £5 million; 31 December
2016: £5 million). An increase of 1% in the house price inflation rate would
increase the value by £6 million (30 June 2016: £6 million; 31 December 2016:
£6 million) and a decrease of 1% would decrease the value by £6 million (30
June 2016: £6 million; 31 December 2016: £6 million).
Included within financial assets and liabilities are related loans and
receivables of £346 million (31 December 2016: £380 million), borrowings of
£65 million (31 December 2016: £87 million) and derivative liabilities of £243
million (31 December 2016: £255 million) pertaining to a reinsurance and
retrocession arrangement assumed following the acquisition of Abbey Life.
These assets and liabilities are valued using a discounted cash flow model
that includes valuation adjustments in respect of liquidity and credit risk.
At 30 June 2017, the net of these balances was an asset of £38 million (31
December 2016: asset of £38 million). The valuation is sensitive to movements
in the euro interest rate swap curve.
An increase of 100bps in the swap curve would decrease the aggregate value by
£3 million (31 December 2016: £4 million) and a decrease of 100bps would
increase the aggregate value by £3 million (31 December 2016: £4 million).
Also included within derivative assets and derivative liabilities are
longevity swap contracts with corporate pension schemes assumed following the
acquisition of Abbey Life with a fair value of £45 million (31 December 2016:
£53 million) and £13 million (31 December 2016: £17 million) respectively.
These derivatives are valued on a discounted cash flow basis, key inputs to
which are the overnight interest swap curve and RPI and CPI inflation rates.
An increase of 100bps in the swap curve would decrease the value by £8 million
(31 December 2016: £10 million) and a decrease of 100bps would increase the
value by £8 million (31 December 2016: £10 million). An increase of 1% in the
RPI and CPI inflation rates would increase the value by £5 million (31
December 2016: £5 million) and a decrease of 1% would decrease the value by £5
million (31 December 2016: £5 million).
13.2.4 Transfers of financial instruments between Level 1 and Level 2
At 30 June 2017
From Level 1 From Level 2
to Level 2 to Level 1
£m £m
Financial assets at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities 98 163
At 30 June 2016
From Level 1 From Level 2
to Level 2 to Level 1
£m £m
Financial assets at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities 293 234
Collective investment schemes 6 -
At 31 December 2016
From Level 1 From Level 2
to Level 2 to Level 1
£m £m
Financial assets at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities 155 153
Consistent with the prior period, all the Group's Level 1 and Level 2 assets
have been valued using standard market pricing sources.
The application of the Group's fair value hierarchy classification methodology
at an individual security level with regard to factors such as market depth
and bid - ask spreads resulted in an overall net movement of financial assets
from Level 2 to Level 1 in the period.
13.2.5 Movement in Level 3 financial instruments measured at fair value
30 June 2017
At Total Purchases Sales Transfers from Level 1 and Transfers to Level 1 At Unrealised (losses)/
1 January (losses)/ £m £m Level 2 and Level 2 30 June gains on assets
2017 gains £m £m 2017 held at end
£m in income statement £m of period
£m £m
Financial assets
Derivatives 53 (2) - (6) - - 45 (1)
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables 812 (4) 169 (45) - - 932 (4)
Equities 671 12 45 (96) - (1) 631 13
Fixed and variable rate income securities 146 24 73 (34) - (2) 207 31
Collective investment schemes 89 (18) 5 (17) 20 - 79 (14)
1,718 14 292 (192) 20 (3) 1,849 26
Total financial assets 1,771 12 292 (198) 20 (3) 1,894 25
At Total Purchases £m Sales/ Transfers from Level 1 Transfers At Unrealised (gains)/losses on liabilities held at
1 January 2017 (gains)/losses repayments £m and Level 2 to Level 1 and Level 2 30 June end period
£m in income statement £m £m £m 2017 £m
£m
Financial liabilities
Derivatives 272 (12) - (4) - - 256 (12)
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings 270 1 - (38) - - 233 1
Total financial liabilities 542 (11) - (42) - - 489 (11)
During the period, updates to the Group's observations, in particular with
regard to the nature and liquidity of underlying assets held within a
collective investment scheme, resulted in a net transfer from Levels 1 and 2
to Level 3.
Gains and losses on Level 3 financial instruments are included in net
investment income in the condensed consolidated income statement. There were
no gains or losses recognised in other comprehensive income.
30 June 2016
At Total Purchases Sales Transfers Transfers At Unrealised gains on assets
1 January 2016 gains/ £m £m from Level 1 and Level 2 to Level 1 30 June held at end
£m (losses) £m and Level 2 2016 of period
in income statement £m £m £m
£m
Financial assets
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables 268 25 43 (5) - - 331 25
Equities 606 59 31 (51) 2 (1) 646 58
Investment in joint venture 149 - - (149) - - - -
Fixed and variable rate income securities 330 (2) - (97) 12 - 243 -
Collective investment schemes 82 1 2 1 - - 86 1
1,435 83 76 (301) 14 (1) 1,306 84
Less amounts classified as held for sale (149) - - 149 - - - -
Total financial assets 1,286 83 76 (152) 14 (1) 1,306 84
At Total Purchases Repayments £m Transfers Transfers At Unrealised losses on liabilities
1 January losses £m from Level 1 to Level 1 30 June held at end
2016 in income statement and Level 2 and Level 2 2016 of period
£m £m £m £m £m £m
Financial liabilities
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings 194 4 - (12) - - 186 4
Total financial liabilities 194 4 - (12) - - 186 4
31 December 2016
At Total Effect of Sales Transfers Transfers At Unrealised gains on assets
1 January 2016 gains/ acquisitions/ £m from Level 1 and Level 2 to Level 1 31 December 2016 held at end
£m (losses) in income statement purchases £m and Level 2 £m of period
£m £m £m £m
Financial assets
Derivatives - - 53 - - - 53 -
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables 268 31 536 (23) - - 812 31
Equities 606 89 83 (106) 1 (2) 671 91
Investment in joint ventures 149 - - (149) - - - -
Fixed and variable rate income securities 330 (2) 20 (209) 31 (24) 146 7
Collective investment schemes 82 11 8 (12) - - 89 7
1,435 129 647 (499) 32 (26) 1,718 136
Less amounts classified as held for sale (149) - - 149 - - - -
Total financial assets 1,286 129 700 (350) 32 (26) 1,771 136
At Net losses Effect of acquisitions Repayments Transfers Transfers At Unrealised losses on liabilities
1 January 2016 in income £m £m from Level 1 to Level 1 31 December 2016 held at end
£m £m and Level 2 and Level 2 £m of period
£m £m £m
Financial liabilities
Derivatives - - 272 - - - 272 -
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings 194 15 87 (26) - - 270 15
Total financial liabilities 194 15 359 (26) - - 542 15
14. CASH FLOWS FROM OPERATING ACTIVITIES
The following analysis gives further detail behind the 'cash
generated/(utilised) by operations' figure in the condensed statement of
consolidated cash flows.
Half year ended 30 Jun 2017 Half year ended 30 Jun 2016 Year ended
£m £m 31 Dec 2016
£m
(Loss)/profit for the period before tax (69) 60 (70)
Non-cash movements in profit for the period before tax
Fair value (gains)/losses on:
Investment property (17) 23 (26)
Financial assets (1,301) (3,497) (4,548)
Change in fair value of borrowings 7 10 34
Amortisation of intangible assets 54 45 90
Change in present value of future profits (7) 5 11
Change in unallocated surplus 77 32 (4)
Share-based payment charge 4 2 7
Interest expense on borrowings 64 62 122
Net interest expense/(income) on Group defined benefit pension scheme liability/asset 6 (10) (21)
Other losses/(gains) on pension schemes 2 (2) 5
Decrease/(increase) in investment assets 1,908 886 (650)
Decrease in reinsurance assets 361 25 345
(Decrease)/increase in insurance contract and investment contract liabilities (859) 2,688 2,489
(Decrease)/increase in deposits received from reinsurers (18) 36 14
(Decrease)/increase in obligation for repayment of collateral received (101) 1,339 898
Net decrease/(increase) in working capital 205 (95) (486)
Other items:
Contributions to defined benefit pension schemes (40) (8) (55)
Cash generated/(utilised) by operations 276 1,601 (1,845)
15. RELATED PARTY TRANSACTIONS
The nature of the related party transactions of the Group has not changed from
those referred to in the Group's consolidated financial statements for the
year ended 31 December 2016.
There were no transactions with related parties during the half year ended 30
June 2017 which have had a material effect on the results or financial
position of the Group.
16. CONTINGENT LIABILITIES
In the normal course of business the Group is exposed to certain legal issues,
which involve litigation and arbitration. At the period end, the Group has a
number of contingent liabilities in this regard, none of which are considered
by the Directors to be material.
17. EVENTS AFTER THE REPORTING PERIOD
On 6 July 2017, PGH issued a US$500 million Tier 2 bonds due 2027 with a
coupon of 5.375%. The proceeds from the bond issuance were used to repay £384
million of the unsecured revolving credit facility.
On 8 August 2017, PGH repaid the remaining principal outstanding of £166
million on the unsecured revolving credit facility.
On 23 August 2017, the Board declared an interim dividend per share of 25.1p
for the half year ended 30 June 2017 (half year ended 30 June 2016: 26.7p).
The cost of this dividend has not been recognised as a liability in the
condensed consolidated interim financial statements for the half year ended 30
June 2017 and will be charged to the statement of consolidated changes in
equity when paid.
ADDITIONAL LIFE COMPANY ASSET DISCLOSURES
The analysis of the asset portfolio provided below comprises the assets held
by the Group's life companies. It excludes other Group assets such as cash
held in the holding and service companies and the assets held by the
non-controlling interest in consolidated collective investment schemes; and is
stated net of derivative liabilities.
The following table provides an overview of the exposure by asset category of
the Group's life companies' shareholder and policyholder funds:
30 June 2017
Carrying value Shareholder and Participating Participating Unit-linked2 Total3
non-profit funds1 supported1 non-supported2 £m £m
£m £m £m
Cash and cash equivalents 1,324 2,403 3,955 1,755 9,437
Debt securities - gilts 3,095 442 6,431 1,833 11,801
Debt securities - bonds 8,767 1,794 6,404 3,237 20,202
Equity securities 170 56 5,476 15,936 21,638
Property investments 140 71 858 595 1,664
Other investments4 953 126 1,671 7,349 10,099
At 30 June 2017 14,449 4,892 24,795 30,705 74,841
Cash and cash equivalents in Group holding companies 691
Cash and financial assets in other Group companies 443
Financial assets held by the non-controlling interest in 1,165
consolidated collective investment schemes
Total Group consolidated assets 77,140
Comprised of:
Investment property 650
Financial assets 76,147
Cash and cash equivalents 1,768
Derivative liabilities (1,425)
77,140
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 This information is presented on a look through basis to underlying
funds where available.
4 Includes equity release mortgages of £539 million, other loans of £393
million, net derivative assets of £1,197 million, reinsurers' share of
investment contracts of £6,606 million, and other investments of £1,364
million.
31 December 2016
Carrying value Shareholder and Participating Participating Unit-linked Total
non-profit funds supported non-supported £m £m
£m £m £m
Cash and cash equivalents 1,239 2,457 4,342 1,858 9,896
Debt securities - gilts 3,121 425 6,724 2,163 12,433
Debt securities - bonds 8,645 1,878 6,427 2,926 19,876
Equity securities 182 53 5,699 15,747 21,681
Property investments 144 74 802 619 1,639
Other investments1 833 188 1,849 7,449 10,319
At 31 December 2016 14,164 5,075 25,843 30,762 75,844
Cash and cash equivalents in Group holding companies 570
Cash and financial assets in other Group companies 449
Financial assets held by the non-controlling interest in consolidated collective investment schemes 931
Total Group consolidated assets 77,794
Comprised of:
Investment property 646
Financial assets 77,049
Cash and cash equivalents 1,666
Derivative liabilities (1,567)
77,794
1 Includes equity release mortgages of £433 million, policy loans of £10
million, other loans of £308 million, net derivative assets of £1,468 million,
reinsurers' share of investment contracts of £6,808 million, and other
investments of £1,292 million.
The following table analyses by type the debt securities of the life
companies:
30 June 2017
Analysis by type of debt securities Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
Gilts 3,095 442 6,431 1,833 11,801
Other government and supranational2 1,167 409 2,215 628 4,419
Corporate - financial institutions 3,415 540 1,895 2,160 8,010
Corporate - other 3,400 156 1,664 345 5,565
Asset backed securities ('ABS') 785 689 630 104 2,208
At 30 June 2017 11,862 2,236 12,835 5,070 32,003
2 Includes debt issued by governments; public and statutory bodies;
government backed institutions and supranationals.
31 December 2016
Analysis by type of debt securities Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
Gilts 3,121 425 6,724 2,163 12,433
Other government and supranational 1,195 474 2,103 328 4,100
Corporate - financial institutions 3,375 531 1,983 2,081 7,970
Corporate - other 3,219 184 1,700 401 5,504
Asset backed securities ('ABS') 856 689 641 116 2,302
At 31 December 2016 11,766 2,303 13,151 5,089 32,309
The following table sets out a breakdown of the life companies' sovereign and
supranational debt security holdings by country:
30 June 2017
Analysis of sovereign and supranational debt security holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK 3,373 504 6,696 1,842 12,415
Supranationals 640 100 373 26 1,139
USA 14 4 111 203 332
Germany 131 90 560 78 859
France 33 28 107 20 188
Netherlands 36 23 117 6 182
Italy - - - 25 25
Spain - - - 20 20
Other - non-Eurozone 17 90 636 235 978
Other - Eurozone 18 12 46 6 82
At 30 June 2017 4,262 851 8,646 2,461 16,220
31 December 2016
Analysis of sovereign and supranational debt security holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK 3,369 494 7,051 2,173 13,087
Supranationals 673 144 446 20 1,283
USA 16 5 25 107 153
Germany 143 103 526 45 817
France 40 25 90 11 166
Netherlands 16 12 112 6 146
Italy - - - 26 26
Spain - - - 10 10
Other - non-Eurozone 45 114 542 87 788
Other - Eurozone 14 2 35 6 57
At 31 December 2016 4,316 899 8,827 2,491 16,533
The following table sets out a breakdown of the life companies' financial
institution corporate debt security holdings by country:
30 June 2017
Analysis of financial institution corporate Shareholder and non-profit funds Participating supported Participating Unit-linked Total
debt security holdings by country £m £m non-supported £m £m
£m
UK 1,576 76 775 765 3,192
USA 628 53 444 220 1,345
Germany 111 9 37 66 223
France 167 10 51 125 353
Netherlands 236 49 121 94 500
Italy 13 - 8 10 31
Ireland 32 - - 24 56
Spain 1 - 15 12 28
Other - non-Eurozone 545 321 413 776 2,055
Other - Eurozone 106 22 31 68 227
At 30 June 2017 3,415 540 1,895 2,160 8,010
31 December 2016
Analysis of financial institution corporate Shareholder and non-profit funds Participating supported Participating Unit-linked Total
debt security holdings by country £m £m non-supported £m £m
£m
UK 1,607 65 736 924 3,332
USA 602 56 403 271 1,332
Germany 75 1 27 34 137
France 165 6 73 121 365
Netherlands 249 58 190 112 609
Italy 15 - 7 11 33
Ireland 30 - - 29 59
Spain 1 - 15 10 26
Other - non-Eurozone 550 328 499 516 1,893
Other - Eurozone 81 17 33 53 184
At 31 December 2016 3,375 531 1,983 2,081 7,970
The following table sets out a breakdown of the life companies' corporate -
other debt security holdings by country:
30 June 2017
Analysis of corporate - other debt security holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK 1,560 50 822 168 2,600
USA 676 32 252 59 1,019
Germany 256 45 135 24 460
France 264 24 151 28 467
Netherlands 59 - 16 3 78
Italy 58 1 35 5 99
Ireland 3 - 1 6 10
Spain 47 - 25 2 74
Other - non-Eurozone 377 4 192 46 619
Other - Eurozone 100 - 35 4 139
At 30 June 2017 3,400 156 1,664 345 5,565
31 December 2016
Analysis of corporate - other debt security holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK 1,517 74 830 211 2,632
USA 567 33 303 83 986
Germany 256 38 128 25 447
France 276 17 127 28 448
Netherlands 69 - 17 4 90
Italy 62 1 35 5 103
Ireland 4 - 1 6 11
Spain 48 - 23 5 76
Other - non-Eurozone 381 7 217 31 636
Other - Eurozone 39 14 19 3 75
At 31 December 2016 3,219 184 1,700 401 5,504
The following table sets out a breakdown of the life companies' ABS holdings
by country:
30 June 2017
Analysis of ABS holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK 668 489 545 78 1,780
USA 4 4 4 20 32
Germany - 62 5 - 67
France - 43 - - 43
Netherlands 9 75 33 1 118
Ireland 28 1 25 - 54
Other - non-Eurozone 76 1 8 3 88
Other - Eurozone - 14 10 2 26
At 30 June 2017 785 689 630 104 2,208
31 December 2016
Analysis of ABS holdings by country Shareholder and non-profit funds Participating supported Participating Unit-linked Total
£m £m non-supported £m £m
£m
UK
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