REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2014 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 2

Phoenix groupAnnouncement

18/03/2015 07:01

- Part 2: For the preceding part double click  ID:nRSR7166Ha 

products. Phoenix is committed to try to increase levels of engagement with its customers. 
 
We ensure our customers' pension funds are protected from potential fraudsters by working closely with industry bodies and
other providers to keep abreast of the latest schemes. 
 
How we measure delivery 
 
A programme of customer research continues, with an average of 1,500 customers each month participating in automated
telephone surveys. The results remain positive, with an overall customer satisfaction score of 4.65 on a 5 scale rating.
Research of this type is invaluable as it helps inform our service proposition which puts customers at the heart of what we
do, and creates an opportunity for customers to recommend improvement. We also monitor volumes of customer complaints about
our service, which have reduced by nearly a third in 2014. Service complaints as a percentage of customer transactions were
0.23% against a 0.5% target. 
 
Key initiatives and
progress in 2014 
 
-  We have increased policyholder payments through inherited estate distribution totalling £185 million. 
 
-  For many of our funds, we have reintroduced annual bonus payments, a sign that our with profits funds are returning to a
healthier position under our stewardship. 
 
-  Major reforms to the UK retirement market were announced in the 2014 Budget. As well as increased triviality limits
taking effect almost immediately, from April 2015 customers will be able to take their entire pension fund as cash subject
to tax at their marginal rate. Since the Budget, we have introduced new freedoms and flexibility to those customers who had
made decisions immediately prior to the announcements being made. It is important to continue to ensure the right customer
outcomes are being achieved and that informed decisions on valuable guarantees are being taken. 
 
-  We have increased the use of the Origo faster transfer system to now incorporate corporate pensions business. Speed of
pension transfer pay-outs is now below 10 days. 
 
-  We prevented £22 million of transfers to fraudulent schemes in 2014. 
 
-  Our Financial Ombudsman Service (FOS) overturn rate has remained stable at 21%. 
 
-  We have developed new mobile and tablet-friendly versions of the Phoenix Life website. 
 
PRIORITIES FOR 2015 
 
-  Communicating with our customers as they approach their retirement age to set out their options clearly, so that they
are able to make informed decisions. 
 
-  Supporting the Government's new PensionWise service and encouraging our customers to both use this service and seek
independent advice on their retirement decision-making. 
 
-  Continue to take actions to prepare for the possible range of outcomes following key regulatory and legislative changes
in 2014. 
 
-  Encouraging customer engagement with the products they hold with Phoenix. 
 
Engage People 
 
For further details of employee engagement initiatives
See the full Corporate Responsibility report on our website. 
 
Our people underpin everything that we do. They make it possible for us to enhance value and improve service for customers.
They make it possible to deliver returns for policyholders. Therefore we make sure we do everything we can to provide a
challenging and rewarding environment in which our people can thrive. 
 
how we manage delivery 
 
The engagement of our workforce is hugely important for the success of our business. We keep our finger on the pulse
through an annual staff survey, which has again returned scores ahead of the Financial Services Benchmark. 2014 was the
fifth year of this annual survey, and our engagement score for Phoenix Life and Group was 78%, which represents a 2%
increase compared to 2013. We use the results to drive continuous improvement in staff engagement, planning activities at a
Group and team level informed by the MI provided. 
 
KEY INITIATIVES AND PROGRESS IN 2014
We have a principles-led approach to maintaining a collaborative and successful team which we continued to apply in 2014.
We have five corporate values which outline how we work as individuals and how we interact with each other. We regularly
communicate our vision for the organisation and our shared goals, most recently through a 'Strategy on a Page' campaign
which brought the fundamental purpose and targets of the business together in one document. Our efforts to provide a
positive working environment led 94% of staff who completed our annual survey to agree that they would 'go the extra mile'
at work, and 80% of our people said they would recommend this company as a great place to work. 
 
Building on the success of development centres held in 2013, we have held a further two centres to develop our future
leaders. We currently have leaders enrolled in programmes with both the Open University and Ashridge. This long-term
approach and level of commitment to our people has paid off with a number of internal appointments to senior positions in
2014: three to our Executive Committee and one to the Phoenix Life Management Board. 
 
PRIORITIES FOR 2015 
 
Over 2015 we will continue to communicate our strategy and goals through a variety of channels. We will hold conferences
for senior management to hear and debate our latest plans, and are also investing in a redeveloped intranet which will
provide a modern platform for communication and collaboration. 
 
During 2014, the Group has made significant progress in simplifying its debt structure and improving financial flexibility.
In particular, the divestment of Ignis, senior bond issue and comprehensive debt refinancing have REpositioned the Group to
consider acquisition opportunities. 
 
Opportunities for future growth 
 
Potential market opportunities 
 
We have estimated that the total UK closed life fund market opportunity for Phoenix is more than £300 billion of assets. 
 
The UK closed life fund consolidation opportunity is supported by market dynamics which are expected to generate a supply
of potentially attractive acquisition targets over the medium term. These dynamics include the potential impact of a
changing regulatory framework for financial services companies including the Solvency II and Basel III regulations.
Additionally, there is ongoing capital pressure within the sector, the trend of recycling and refocusing capital from
mature to growth markets, the decline in new with-profits business, changing customer demands and regulatory change, all of
which drives consolidation. We believe this opportunity is also supported by the migration of products to alternative
structures, the cost challenge posed by a fragmented sector and the run-off of closed life funds and the potential exit of
international participants. 
 
Broad spectrum of potential acquisition sizes and structures 
 
Phoenix Group is well placed to find solutions for a range of sellers of life insurance businesses due to the Group's
flexible approach to acquisitions, in particular the Group's appetite to acquiring either life companies, funds or
portfolios of businesses, and all product types across the with-profit, non-profit and unit-linked spectrums. 
 
The financial services sector is evolving and we believe the changing regulatory environment may result in vendors looking
to dispose of various portions of their business. We are able to be flexible about the size and structure of any
acquisition, which should provide us with a variety of opportunities. 
 
Value generation through acquisitions 
 
Phoenix Group will assess potential acquisitions in light of the financial condition of the Group. The criteria we would
target in making an acquisition are: 
 
-  Closed life. Any acquisition would be in the closed life fund sector within the UK or Ireland 
 
-  Value accretive 
 
-  Help to sustain dividends 
 
-  Gearing level supportive of an investment grade rating. 
 
Additional value from acquisitions can be generated through synergies which, combined with our ability to add value to any
acquired book through our four areas of management actions, are fundamental drivers of shareholder value accretion. The
process of extracting synergies is one which we have undertaken successfully from our existing book in recent years and we
are well positioned to be able to replicate this in future. 
 
The divestment of Ignis resulted in a long-term strategic alliance with Standard Life Investments. Given its existing
position as the UK's largest specialist consolidator of closed life funds, Phoenix has agreed with Standard Life
Investments a mechanism to share value resulting from any future transfers of assets from Phoenix to Standard Life
Investments. 
 
Potentially, our business may be unable to source and execute successful transactions, but as a standalone business and in
the absence of further acquisitions, Phoenix is expected to continue to generate strong and predictable cash flows from the
operating companies to support commitments at the holding companies including pension scheme contributions, debt servicing
and shareholder dividends. However, in order to grow and maximise value for all stakeholders, we will continue to pursue
opportunities which meet the criteria set out above as and when they arise. 
 
Financial performance 
 
Key performance indicators 
 
Operating companies' cash generation 
 
£567m 
 
2013: £817m 
 
Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends. 
 
Analysis 
 
Continued strong cash generation of £567 million by the Group's operating companies enabled the Group to exceed its full
year cash generation target for 2014 of £500 million to £550 million. The receipt of gross Ignis divestment proceeds
generated a further £390 million of cash in the period. 
 
Management actions contributed £180 million to cash generation, through operational enhancements, restructuring and
de-risking activities. 
 
Definition 
 
Operating companies' cash generation is a measure of cash and cash equivalents remitted by the Group's operating companies
to the holding companies and is available to cover dividends, debt servicing and repayment, pension scheme contributions
and operating expenses. 
 
Quantified target1 
 
The cumulative cash flow target for 2014 to 2019 is £2.8 billion, including Ignis divestment proceeds of £390 million. £957
million out of £2.8 billion has been achieved by 31 December 2014. Management has set a 2015 annual cash generation target
of between £200 million and £250 million. 
 
Group MCEV 
 
£2,647m 
 
2013: £2,378m 
 
The Board considers that MCEV provides the most relevant and consistent means of assessing the Group's ability to increase
value through the delivery of incremental management actions. 
 
Analysis 
 
Group MCEV increased by £269 million at 31 December 2014, benefiting from £261 million of value-enhancing management
actions delivered in the period and the positive impact of the divestment of Ignis. This has more than offset dividend
payments and the adverse impacts of regulatory changes and increases in the market value of the Group's debt recognised in
the period. 
 
Definition 
 
The basis of calculation of Group MCEV is set out in note 1 of the MCEV supplementary information. 
 
Incremental MCEV is defined as the enhancement of MCEV through management actions. 
 
Quantified target 
 
The Group's incremental MCEV target is £300 million between 2014 and 2016, of which £261 million has now been delivered.
Management have set a new target of £400 million of incremental MCEV between 2014 and 2016. 
 
Gearing 
 
34% 
 
2013: 44% 
 
The gearing ratio is the Group's measure of its level of debt compared to its equity on a gross MCEV basis. 
 
Analysis 
 
Gearing reduced to 34% at 31 December 2014, reflecting the Group's debt refinancing during the year and the disposal of
Ignis. 
 
Definition 
 
The Group calculates its gearing as gross shareholder debt (gearing basis) as a percentage of gross MCEV. Gross shareholder
debt (gearing basis) is defined as the sum of the IFRS carrying value of shareholder debt and 50% of the IFRS carrying
value of the Tier 1 notes given the hybrid nature of that instrument. Gross MCEV is defined as the sum of the Group MCEV
and the value of the shareholder and Tier 1 debt as included in the MCEV. 
 
Quantified target 
 
Having successfully completed comprehensive debt refinancing in July, we achieved our 40% gearing target ahead of schedule.
Following the Tier 1 notes exchange announced in January 2015 and in order to align the Group's measure of its level of
debt with that used to determine the interest margin payable on its bank facility, the Group will monitor gearing by
reference to the financial leverage ratio going forwards. Details on the calculation of this metric are included below. 
 
financial leverage 
 
39.3% 
 
2013: 49.6% 
 
Financial leverage is the Group's measure of its level of debt that determines the interest margin payable on its bank debt
facilities. 
 
Analysis 
 
Financial leverage reduced to 39.3% at 31 December 2014, reflecting the Group's debt refinancing and the disposal of Ignis.
The reduction below 40% has reduced the margin above LIBOR payable on the PGH Capital bank facility from 350bps to
312.5bps. 
 
Definition 
 
The Group calculates financial leverage as gross shareholder debt (financial leverage basis) as a percentage of gross
MCEV. 
 
Gross shareholder debt (financial leverage basis) is defined as the sum of the notional face value of shareholder debt and
100% of the face value of the Tier 1 notes. Gross MCEV is defined as the sum of the Group MCEV and the value of the
shareholder and Tier 1 debt as included in the MCEV. 
 
Quantified target 
 
The Group will target a financial leverage level consistent with the achievement of an investment grade credit rating, upon
which a further 50bps margin reduction on the outstanding bank facility would be triggered. 
 
Dividend per share 
 
53.4p 
 
2013: 53.4p 
 
Analysis 
 
The Board has recommended a final dividend of 26.7p per share, bringing the total dividend for the year to 53.4p per share.
The final dividend is due to be paid on 27 April 2015, subject to shareholder approval at the Company's AGM. 
 
Definition 
 
The dividend per share consists of the interim dividend per share paid in the year and the final dividend per share
recommended for the year. 
 
Group IFRS operating profit 
 
£483m 
 
2013: £439m 
 
The Board considers that Group IFRS operating profit is a more representative measure of performance than Group IFRS profit
before tax as it provides long-term performance information unaffected by short-term economic volatility. 
 
Analysis 
 
Group IFRS operating profit has increased by £44 million to £483 million due to one-off benefits generated from system and
modelling improvements of £165 million (2013: £98 million) and the positive impact of assumption changes compared to the
prior year. 
 
Definition 
 
The basis of calculation of Group IFRS operating profit is set out in note 6 of the IFRS consolidated financial
statements. 
 
IGD surplus (estimated) 
 
£1.2bn 
 
2013: £1.2bn 
 
Insurance Groups' Directive ('IGD') surplus is the Pillar 1 regulatory assessment of capital adequacy at a PLHL level. 
 
Analysis 
 
The estimated IGD surplus has remained stable at £1.2 billion with capital generation and the positive impact of management
actions offsetting dividend payments and debt financing and repayments of £0.6 billion in the period. The surplus of £1.2
billion represents headroom of £0.5 billion (2013: £0.5 billion) over the Group's IGD regulatory capital policy. 
 
Definition 
 
The IGD surplus is a regulatory capital measure which calculates surplus capital at the highest EEA level insurance group
holding company, which is Phoenix Life Holdings Limited ('PLHL'). IGD surplus is defined as Group capital resources less
the Group capital resource requirement. 
 
Regulatory capital policy 
 
The Group maintains group capital resources at the PLHL level at an amount in excess of 105% of the with-profit insurance
capital component ('WPICC'), being an additional capital requirement of with-profit funds, plus 145% of the Group capital
resource requirement less the WPICC as agreed with the PRA. 
 
PLHL ICA surplus (estimated) 
 
£0.7bn 
 
2013: £1.2bn 
 
PLHL ICA surplus is the economic regulatory assessment of capital adequacy at a PLHL level. 
 
Analysis 
 
The reduction in the estimated PLHL debt ICA surplus of £0.5 billion reflects the impacts of dividend payments, debt
refinancing and repayments in the period, together with the adverse impacts of falling yields on the Group's capital
requirements and the strengthening of stress assumptions related to longevity, credit and correlations. This has been
partly offset by free surplus generation, the divestment of Ignis and the positive impact of management actions in the
period. The surplus of £0.7 billion represents headroom of £0.6 billion (2013: £1.1 billion) over the PLHL ICA regulatory
capital policy. 
 
Definition 
 
PLHL ICA surplus represents an assessment on an economic basis of the capital resources and requirements arising from the
obligations and risks which exist outside the life companies. The measure is calculated at the highest EEA level insurance
group holding company, being PLHL. 
 
Regulatory capital policy 
 
As agreed with the PRA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million. 
 
Cash generation 
 
£567m 
 
2013: £817m 
 
Operating companies'
cash generation 
 
Cash generation 
 
The Group's cash flows are generated from the interest earned on capital, the release of excess capital as the life funds
run-off and policyholder charges and fees earned on assets under management. The Group's closed life funds provide
predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and
for repayment of outstanding debt. Although investment returns are less predictable, some of the investment risk is borne
by policyholders. 
 
Holding companies' cash flows 
 
The statement of cash flows prepared in accordance with IFRS combines cash flows relating to shareholders and cash flows
relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two.
For this reason, the following analysis of cash flows focuses on the holding companies' cash flows, which reflect cash
flows relating only to shareholders and which are, therefore, more representative of the cash that could potentially be
distributed as dividends or used for the repayment of debt, the