REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2014 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 14
18/03/2015 07:01
- Part 14: For the preceding part double click ID:nRSR7166Hm
186 186
Net asset value attributable to unitholders1 5,744 - 5,744
Investment contract liabilities1 8,578 - 8,578
Financial liabilities measured at amortised cost:
Borrowings 2,173 1,997 2,194
Deposits received from reinsurers 385 350 385
Obligations for repayment of collateral received2 7,284 - -
Total financial liabilities 26,511 19,248
34.2 FAIR VALUE HIERARCHY
34.2.1 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 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 and some borrowings with no external market is determined by internally developed discounted cash flow models using a
risk adjusted discount rate corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Company 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.
34.2.2 Fair value hierarchy of financial instruments
The tables below separately identify financial instruments carried at fair value from those measured on another basis but
for which fair value is disclosed.
2014
Level 1 Level 2 Level 3 Total
£m £m £m fair value
£m
Financial assets measured at fair value
Derivatives 18 2,540 - 2,558
Financial assets designated at fair value through profit
or loss upon initial recognition:
Equities 12,315 149 704 13,168
Investment in joint ventures - - 133 133
Fixed and variable rate income securities 24,639 9,010 735 34,384
Collective investment schemes 2,579 923 81 3,583
39,533 10,082 1,653 51,268
Total financial assets measured at fair value 39,551 12,622 1,653 53,826
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost - 36 186 222
Total financial assets 39,551 12,658 1,839 54,048
Fair value hierarchy information for non-financial assets measured at fair value is included in note 32 for land and
buildings at valuation and in note 33 for investment properties.
Level 1 Level 2 Level 3 Total
£m £m £m fair value
£m
Financial liabilities measured at fair value
Derivatives 40 2,151 1 2,192
Financial liabilities designated at fair value through profit
or loss upon initial recognition:
Investment contract liabilities - 8,451 - 8,451
Borrowings - - 184 184
Net asset value attributable to unitholders 4,659 - - 4,659
4,659 8,451 184 13,294
Total financial liabilities measured at fair value 4,699 10,602 185 15,486
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 553 1,145 1,698
Deposits received from reinsurers - 408 - 408
Total financial liabilities for which fair values are disclosed - 961 1,145 2,106
Total financial liabilities 4,699 11,563 1,330 17,592
2013 Restated
Level 1 Level 2 Level 3 Total
£m £m £m fair value
£m
Financial assets measured at fair value
Derivatives 49 1,917 - 1,966
Financial assets designated at fair value through profit
or loss upon initial recognition:
Equities 13,136 149 628 13,913
Investment in joint ventures - - 125 125
Fixed and variable rate income securities 25,494 9,081 935 35,510
Collective investment schemes 2,591 1,065 116 3,772
41,221 10,295 1,804 53,320
Less amounts classified as held for sale (note 4.2) (55) - - (55)
41,166 10,295 1,804 53,265
Total financial assets measured at fair value 41,215 12,212 1,804 55,231
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost - 1,869 116 1,985
Total financial assets 41,215 14,081 1,920 57,216
Level 1 Level 2 Level 3 Total
£m £m £m fair value
£m
Financial liabilities measured at fair value
Derivatives 40 2,118 3 2,161
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Investment contract liabilities - 8,578 - 8,578
Borrowings - - 186 186
Net asset value attributable to unitholders 5,744 - - 5,744
5,744 8,578 186 14,508
Total financial liabilities measured at fair value 5,784 10,696 189 16,669
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 229 1,965 2,194
Deposits received from reinsurers - 385 - 385
Total financial liabilities 5,784 11,310 2,154 19,248
34.2.3 Level 3 financial instrument sensitivities
Included in Level 3 investments are two property investment structures with a value of £59 million (2013: £15 million)
within fixed and variable rate income securities and £133 million (2013 Restated: £125 million) within investment in joint
ventures.
Both investments have been valued by taking the fair value of the property within the structures, which have been
independently valued, less the fair value of the debt within the structures. The valuations are sensitive to movements in
yields on the underlying property portfolio. An increase in yields of 25bps would reduce the value of the first investment
by £8 million (2013: £8 million) and the second investment by £23 million (2013: £23 million). A reduction in yields of
25bps would increase the value of the first investment by £9 million (2013: £9 million) and the second investment by £25
million (2013: £25 million).
Level 3 investments in indirect property, equities (including private equity) 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.
Debt securities categorised as Level 3 investments, with the exception of 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.
Included within fixed and variable rate securities are investments in local authority loans. These investments are valued
using a simple calculation model taking a comparable UK Treasury stock and applying 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 25 bps would decrease the value by £1 million (2013: £1 million) and a decrease of 25 bps would
increase the value by £1 million (2013: £1 million).
Borrowings measured at fair value and categorised as Level 3 financial liabilities comprise the property reversion loans,
measured using an internally developed model. The valuation is sensitive to increases (decreases) in the fair value of
relevant residential property reversions which would result in an equivalent higher (lower) fair value of property
reversion loans. Details of the valuation of the underlying residential property reversions are included in note 23.
34.2.4 Transfers of financial instruments between Level 1 and Level 2
2014
From From
Level 1 to Level 2 to
Level 2 Level 1
£m £m
Financial assets measured at fair value
Financial assets designated at fair value through profit or loss upon initial recognition
Fixed and variable rate income securities 167 372
Collective investment schemes 2 -
2013 Restated
From From
Level 1 to Level 2 to
Level 2 Level 1
£m £m
Financial assets measured at fair value
Derivatives - 5
Financial assets designated at fair value through profit or loss upon initial recognition
Fixed and variable rate income securities 724 238
Collective investment schemes 243 -
Financial liabilities measured at fair value
Derivatives - 20
Consistent with the prior year, 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, in
particular observations with regard to measures of market depth and bid-ask spreads, have resulted in an overall net
movement of financial assets from level 2 to level 1 in the period.
34.2.5 Movement in Level 3 financial instruments measured at fair value
2014
At Totalgains in income statement Purchases Sales Transfers from Level 1 and Level 2 Transfers At Unrealised gains on
1 January 2014 £m £m £m £m to 31 December 2014 assets held at
£m Level 1 £m end of period
and Level 2 £m
£m
Financial assets
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