REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2014 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 16

Phoenix groupAnnouncement

18/03/2015 07:01

- Part 16: For the preceding part double click  ID:nRSR7166Ho 

The collective
investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date,
the collective investment schemes have continued to process both investments and realisations in a normal manner and have
not imposed any restrictions or delays. 
 
Some of the Group's cash and cash equivalents are held through collective investment schemes. The collective investment
schemes have the power, in an extreme stress, to restrict and/or suspend withdrawals, which would, in turn, affect
liquidity. To date, the collective investment schemes have continued to process both investments and realisations in a
normal manner and have not imposed any restrictions or delays. 
 
The following table provides a maturity analysis showing the remaining contractual maturities of the Group's undiscounted
financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included
based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance
with the requirements of IFRS 4: 
 
2014 
 
                                                   1 year or           1-5     Greater than  No fixed  Total   
                                                   less or on demand   years   5 years       term      £m      
                                                   £m                  £m      £m            £m                
 Liabilities under insurance contracts             3,293               11,037  27,801        799       42,930  
 Investment contracts                              8,451               -       -             -         8,451   
 Borrowings1                                       153                 992     563           184       1,892   
 Deposits received from reinsurers1                33                  112     375           -         520     
 Derivatives1                                      70                  68      3,509         -         3,647   
 Net asset value attributable to unitholders       4,659               -       -             -         4,659   
 Obligations for repayment of collateral received  954                 -       -             -         954     
 Reinsurance payables                              9                   -       -             -         9       
 Payables related to direct insurance contracts    358                 -       -             -         358     
 Accruals and deferred income                      130                 -       -             -         130     
 Other payables                                    360                 -       -             -         360     
 
 
2013 Restated 
 
                                                   1 year or           1-5     Greater than  No fixed  Total   
                                                   less or on demand   years   5 years       term      £m      
                                                   £m                  £m      £m            £m                
 Liabilities under insurance contracts             3,603               10,774  25,899        2,453     42,729  
 Investment contracts                              8,578               -       -             -         8,578   
 Borrowings1                                       176                 1,925   487           186       2,774   
 Deposits received from reinsurers1                35                  119     401           -         555     
 Derivatives1                                      927                 70      2,583         3         3,583   
 Net asset value attributable to unitholders       5,744               -       -             -         5,744   
 Obligations for repayment of collateral received  6,981               67      236           -         7,284   
 Reinsurance payables                              12                  -       -             -         12      
 Payables related to direct insurance contracts    395                 -       -             -         395     
 Accruals and deferred income                      139                 -       -             -         139     
 Other payables                                    307                 -       -             -         307     
 
 
1 These financial liabilities are disclosed at their undiscounted value and therefore differ to the statement of
consolidated financial position which discloses the discounted value. 
 
Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the
surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included
in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out
within one year of the reporting date. 
 
A significant proportion of the Group's financial assets are held in gilts, cash, supranationals and investment grade
securities which the Group considers sufficient to meet the liabilities as they fall due. The vast majority of these
investments are readily realisable immediately since most of them are quoted in an active market. 
 
40.4 UNIT-LINKED CONTRACTS 
 
For unit-linked contracts the Group matches all the liabilities with assets in the portfolio on which the unit prices are
based. There is therefore no interest, price, currency or credit risk for the Group on these contracts. 
 
In extreme circumstances, the Group could be exposed to liquidity risk in its unit-linked funds. This could occur where a
high volume of surrenders coincides with a tightening of liquidity in a unit-linked fund to the point where assets of that
fund have to be sold to meet those withdrawals. Where the fund affected consists of property, it can take several months to
complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk
to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of
all investors in those funds and to protect the Group's own risk exposure. 
 
40.5 INSURANCE RISK 
 
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes
expense risk. The Phoenix Life segment contracts include the following sources of insurance risk: 
 
 Mortality  higher than expected number of death claims on assurance products and occurrence of one or more large claims;                                                      
 Longevity  faster than expected improvements in life expectancy on immediate and deferred annuity products;                                                                   
 Morbidity  higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies;                                     
 Expenses   policies cost more to administer than expected;                                                                                                                    
 Lapses     the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; and  
 Options    unanticipated changes in policyholder option exercise rates giving rise to increased claims costs.                                                                 
 
 
Objectives and policies for mitigating insurance risk 
 
The Group uses several methods to assess and monitor insurance risk exposures both for individual types of risks insured
and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons,
sensitivity analyses, scenario analyses and stress testing. 
 
The profitability of the run-off of the closed long-term insurance businesses within the Group depends, to a significant
extent, on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over
the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to
set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial
principles by reference to assumptions about the development of financial and insurance risks. 
 
It is therefore necessary for the Directors of each life company to make decisions, based on actuarial advice, which ensure
an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and,
where discretion exists, the level of payments on early termination. 
 
Sensitivities 
 
Insurance liabilities are sensitive to changes in risk variables, such as prevailing market interest rates, currency rates
and equity prices, since these variations alter the value of the financial assets held to meet obligations arising from
insurance contracts and changes in investment conditions also have an impact on the value of insurance liabilities
themselves. Additionally, insurance liabilities are sensitive to the assumptions which have been applied in their
calculation, such as mortality and lapse rates. Sometimes allowance must also be made for the effect on future assumptions
of management or policyholder actions in certain economic scenarios. This could lead to changes in assumed asset mix or
future bonus rates. The most significant non-economic sensitivities arise from mortality, longevity and lapse risk. 
 
A decrease of 5% in assurance mortality, with all other variables held constant, would result in an increase in the profit
after tax in respect of a full year, and an increase in equity of £14 million (2013: £18 million). 
 
An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit
after tax in respect of a full year, and a decrease in equity of £14 million (2013: £18 million). 
 
A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit
after tax in respect of a full year, and an increase in equity of £135 million (2013: £117 million). 
 
An increase of 5% in annuitant longevity, with all other variables held constant, would result in a decrease in the profit
after tax in respect of a full year, and a decrease in equity of £135 million (2013: £116 million). 
 
A decrease of 25% in lapse rates, with all other variables held constant, would result in a decrease in the profit after
tax in respect of a full year, and a decrease in equity of £53 million (2013: £50 million). 
 
An increase of 25% in lapse rates, with all other variables held constant, would result in an increase in the profit after
tax in respect of a full year, and an increase in equity of £46 million (2013: £44 million). 
 
40.5.1 Assumptions 
 
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. 
 
Valuation of non-participating insurance contracts 
 
The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation
method. 
 
Process used to determine assumptions 
 
For participating business in realistic basis companies 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 other business, demographic assumptions are derived by adding a prudent margin to best estimate assumptions. Economic
assumptions are prudent estimates of the returns expected to be achieved on the assets backing the liabilities. 
 
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the
approach across the enlarged Group. The impact of material changes during the year was as follows: 
 
                                    Decrease in insurance  (Decrease)/increase  
                                    liabilities             in insurance        
                                    2014                   liabilities          
                                    £m                     2013                 
                                                           £m                   
 Change in longevity assumptions    (14)                   (6)                  
 Change in persistency assumptions  (13)                   6                    
 Change in expenses assumptions     -                      (7)                  
 
 
Valuation interest rate 
 
For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk neutral
scenarios produced by an economic scenario generator calibrated to market conditions and gilt yields as at the valuation
date. 
 
For funds not subject to realistic reporting, the method used to determine valuation interest rates generally follows the
regulations set out in the Prudential Sourcebook for Insurers. 
 
Assets are firstly hypothecated to classes of business being valued. The valuation interest rates for each block of
business are based on the expected returns of the hypothecated assets. The yield is then adjusted to make allowance for
credit risk, liquidity risk, reinvestment risk and investment management expenses. 
 
Valuation interest rates (after tax for life policies) are typically in the following ranges: 
 
                   2014         2013         
                    %           %            
 Life policies     2.06 - 2.72  2.38 - 2.77  
 Pension policies  2.45 - 3.31  2.91 - 3.67  
 
 
Expense inflation 
 
Expenses are assumed to increase at the rate of increase in the Retail Price Index ('RPI') plus fixed margins in accordance
with the various management service agreements ('MSAs') the Group has in place with outsource partners. For with-profit
business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the
Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings
inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further
margin for adverse deviations may then be added to the rate of expense inflation. 
 
Mortality and longevity rates 
 
Mortality rates are based on published tables, adjusted appropriately to take account of changes in the underlying
population mortality since the table was published, company experience and forecast changes in future mortality. Where
appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality
rates are adjusted to make allowance for future improvements in pensioner longevity. 
 
Lapse and surrender rates (persistency) 
 
The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in
force and the relevant company. Surrender or voluntary premium discontinuances are only assumed for realistic basis
companies. Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted
when it is considered that future policyholder behaviour will be influenced by different considerations than in the past.
In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy
anniversaries on which Market Value Adjustments do not apply. 
 
Discretionary participating bonus rate 
 
For realistic basis companies, the regular bonus rates assumed in each scenario are determined in accordance with each
company's PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to
smoothing rules set out in the PPFM. 
 
Policyholder options and guarantees 
 
Some of the Group's products give potentially valuable guarantees, or give options to change policy benefits which can be
exercised at the policyholders' discretion. These products are described below. 
 
Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before
that date or dates. For pensions contracts, the specified date is the policyholder's chosen retirement date or a range of
dates around that date. For endowment contracts, it is the maturity date of the contract. For with-profit bonds it is often
a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to
with-profit contracts usually increase the guaranteed amount. 
 
There are guaranteed surrender values on a small number of older contracts. 
 
Some pensions contracts include guaranteed annuity options (see deferred annuities in note 40.5.2 for details). The total
amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are
£1,809 million (2013: £1,575 million) and £6 million (2013: £29 million) respectively. 
 
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set
up provisions for the review and possible redress relating to personal pension policies. These provisions, which have been
calculated from data derived from detailed file reviews of specific cases and using a certainty equivalent approach, which
give a result very similar to a market consistent valuation, are included in liabilities arising under insurance contracts.
The total amount provided in the with-profit funds and non-profit funds in respect of the review and possible redress
relating to pension policies, including associated costs, are £284 million (2013: £254 million) and £15 million (2013: £15
million) respectively. 
 
With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash
option allows the policyholder to commute the annuity benefit into cash on guaranteed terms. 
 
40.5.2 Managing product risk 
 
The following sections give an assessment of the risks associated with the Group's main life assurance products, as shown
below