REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2015 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 11
23/03/2016 08:18
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performance of the Group's business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected
movements in liabilities. Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group's core operating activities (for example, actuarial modelling enhancements and data reviews).Impacts arising from the difference between the actual and expected experience for economic items (on
both assets and liabilities) and the impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating profit and are presented in profit before the tax attributable to owners (see section B2). Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.Operating profit also excludes the impact of the following items:· amortisation and impairments of intangible assets;· finance costs attributable to owners;· gains or losses on the
disposal of subsidiaries, associates or joint ventures (net of related costs of disposal);· the financial impacts of mandatory regulatory change;· integration, restructuring or other significant one-off projects; and· any other items which, in the Directors' view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Group's financial performance.
2015
Phoenix Life Unallocated Group Total
£m £m £m
Operating profit/(loss) before adjusting items 336 (12) 324
Investment return variances and economic assumption changes on long-term business 13 - 13
Variance on owners' funds (7) (5) (12)
Amortisation of acquired in-force business (75) - (75)
Amortisation of customer relationships (15) - (15)
Non-recurring items 47 2 49
Financing costs attributable to owners (23) (76) (99)
Segmental result before the tax attributable to owners 276 (91) 185
Non-recurring items include:
· gain of £49 million (net of a £64 million impairment of associated acquired in-force business) arising as a result of
the reassurance arrangement entered into with RGA International (see note F3.1);
· release of provisions associated with external regulatory changes, including the cap on workplace pension charges and
the pension guidance levy, of £17 million;
· corporate project costs of £13 million; and
· net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £4
million.
2014
Phoenix Ignis Unallocated Group Total
Life £m £m £m
£m
Operating profit/(loss) before adjusting items 487 17 (21) 483
Investment return variances and economic assumption changes on long-term business 12 - - 12
Variance on owners' funds (8) - (6) (14)
Amortisation of acquired in-force business (88) - - (88)
Amortisation of customer relationships (15) - - (15)
Non-recurring items (56) (6) 188 126
Financing costs attributable to owners (23) - (65) (88)
Segmental result before the tax attributable to owners 309 11 96 416
Adjust for:
Profit before the tax attributable to owners from discontinued operations (see note I1.1.1) (80)
Profit before tax attributable to owners from continuing operations 336
Non-recurring items include:
· income received in relation to the close-out of the PGL Pension Scheme longevity agreement with the with-profit funds of
£68 million (see note G6.2);
· the profit arising as a result of the divestment of Ignis of £107 million (see note I1.1);
· costs associated with external regulatory changes, including the cap on workplace pension charges of £17 million;
· corporate project costs of £15 million; and
· net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £17
million.
B2. 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 accounting policy adopted in the calculation of operating profit is detailed in note B1.2. 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.
B2.1 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 is defined as the annualised return on the FTSE UK Gilt Index plus 10bps. A risk premium of 300bps is added
to the risk-free yield for equities, 200bps for properties and 100bps for other fixed interest assets, to obtain investment
return assumptions.
The principal assumptions underlying the calculation of the long-term investment return are:
2015 2014
% %
Equities 5.3 6.6
Properties 4.3 5.6
Gilts (15 year gilt) 2.3 3.6
Other fixed interest 3.3 4.6
B2.2 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 return variances and economic assumption changes excluded from the long-term business operating profit are
as follows:
2015 2014
£m £m
Investment return variances and economic assumption changes on long-term business 13 12
Positive investment return variances and economic assumption changes on long-term business of £13 million (2014: £12
million) include the minority share of the result of the consolidated UKCPT property investment structure of £46 million
(2014: £75 million) and a £19 million gain on the purchase of a portfolio of equity release mortgages arising from the
yield uplift on assets available to back annuity liabilities. Increases in yields during the period have also had a
positive impact reflecting short asset positions held relative to the longer term IFRS basis liabilities. These positive
items have been partly offset by the adverse impacts of changes in asset portfolios undertaken in preparation for the
implementation of the new Solvency II regime, together with the impact of widening credit spreads during the period.
B2.3 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:
2015 2014
£m £m
Variances on owners' funds of:
Subsidiary undertakings (12) (19)
The Company - 5
(12) (14)
The negative variance on owners' funds of subsidiary undertakings of £12 million (2014: £19 million) is principally driven
by fair value losses on investments and hedging positions held by the shareholder funds and holding companies.
B3. 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 year.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.
B3.1 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.
2015 2014
£m £m
Profit for the period 249 406
Share of result attributable to non-controlling interests (48) (96)
Profit attributable to owners of the parent 201 310
Analysed as:
Profit attributable to owners of the parent from continuing operations 201 218
Profit attributable to owners of the parent from discontinued operations - 92
The weighted average number of ordinary shares outstanding during the period is calculated as follows:
2015Number million 2014 Number million
Issued ordinary shares at beginning of the period 225 225
Effect of ordinary shares issued - 1
Own shares held by employee benefit trust and Group entities (1) (1)
Weighted average number of ordinary shares 224 225
Basic earnings per share is as follows:
2015 2014
pence pence
Basic earnings per share from continuing operations 89.8 96.7
Basic earnings per share from discontinued operations - 41.0
Total basic earnings per share 89.8 137.7
B3.2 Diluted earnings per share
The result attributable to owners for 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 B3.1 above. The diluted weighted average number of ordinary shares
outstanding during the period is 225 million (2014: 225 million). The Group's deferred bonus share scheme and sharesave
share-based schemes increased the weighted average number of shares on a diluted basis by 490,276 shares for the year ended
31 December 2015 (2014: 465,256).
Diluted earnings per share is as follows:
2015 2014
pence pence
Diluted earnings per share from continuing operations 89.6 96.5
Diluted earnings per share from discontinued operations - 41.0
Total diluted earnings per share 89.6 137.5
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the
diluted earnings per share figure because they did not have a dilutive effect for the periods presented due to the exercise
price being significantly higher than the share price of the Company:
· 5 million warrants issued to certain entities providing finance to the Group on 2 September 2009.
Details of the warrants are given in note E3.2.
B4. DIVIDENDS
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group's owners. Interim dividends are deducted from equity when they are paid.As permitted by Cayman Islands Companies Law, dividends have been charged within equity against the share premium account. Where shareholders exercise a scrip dividend option, the amount of the related dividend is credited to share premium in the statement of consolidated changes in equity and an amount equal to
the nominal value of the shares issued is transferred from share premium to share capital.Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
2015 2014
£m £m
Dividends declared and paid in 2015 120 120
On 17 March 2015, the Board recommended a final dividend of 26.7p per share in respect of the year ended 31 December 2014.
The dividend was approved at the Company's Annual General Meeting, which was held on 23 April 2015. The dividend amounted
to £60 million and was paid on 27 April 2015.
On 19 August 2015, the Board declared an interim dividend of 26.7p per share for the half year ended 30 June 2015. The
dividend amounted to £60 million and was paid on 1 October 2015.
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES
C1. NET INVESTMENT INCOME
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability), fair value gains and losses on financial assets and investment property at fair value and impairment losses on loans and receivables.Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.Dividend income is recognised in the consolidated income statement on the date the right to receive payment is
established, which in the case of listed securities is the ex-dividend date.Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.Fair value gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and
unrealised gains and losses.
2015 2014
£m £m
Investment income
Interest income on loans and receivables at amortised cost 3 4
Interest income on financial assets designated at fair value through profit or loss on initial recognition 1,076 1,156
Dividend income 911 1,098
Rental income 90 95
Net interest income on Group defined benefit pension scheme asset/liability 17 4
2,097 2,357
Fair value (losses)/gains
Loans and receivables at amortised cost - 1
Financial assets at fair value through profit or loss
Designated upon initial recognition (1,178) 2,333
Held for trading - derivatives 5 1,143
Investment property 140 200
(1,033) 3,677
Net investment income 1,064 6,034
C2. ADMINISTRATIVE EXPENSES
Administrative expenses are recognised in the consolidated income statement as incurred.
2015 2014
£m £m
Employee costs 81 86
Outsourcer expenses 97 106
Professional fees 33 29
Office costs 23 23
Investment management expenses and transaction costs 150 122
Direct costs of life companies 15 9
Direct costs of collective investment schemes 17 26
Pension administrative expenses 5 7
Other 9 21
430 429
Employee costs comprise:
2015 2014
£m £m
Wages and salaries 73 77
Social security contributions 8 9
81 86
2015 2014
Number Number
Average number of persons employed 750 757
C3. AUDITOR'S REMUNERATION
During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
2015 2014
£m £m
Audit of the consolidated financial statements 0.5 0.5
Audit of the Company's subsidiaries 2.3 2.3
Audit of MCEV supplementary information 0.4 0.4
3.2 3.2
Audit-related assurance services 0.9 0.8
Reporting accountant assurance services 0.1 0.2
Total fee for assurance services 4.2 4.2
Tax advisory services 0.1 -
Corporate finance services 0.1 0.6
Other non-audit services 0.3 0.3
Total fees for other services 0.5 0.9
Total auditor's remuneration 4.7 5.1
No services were provided by the Company's auditors to the Group's pension schemes in either 2015 or 2014.
Audit-related assurance services includes fees payable for services where the reporting is required by law or regulation to
be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of
interim financial information and services where the work is integrated with the audit itself.
Reporting accountant assurance services relate to assurance reporting on historical information included within investment
circulars.
Corporate finance services fees were £0.1 million (2014: £0.6 million). Fees for 2014 primarily related to services
performed in association with the divestment of Ignis, where management concluded that significant efficiencies would arise
as a result of engaging the Group's auditors to perform the work.
Other non-audit services of £0.3 million (2014: £0.3 million) primarily includes fees payable in respect of assurance
services related to applications made to the regulator with regard to the Group's implementation of Solvency II. In 2014,
the fees principally related to a Solvency II preparedness review required in response to an industry-wide request from the
Prudential Regulation Authority ('PRA').
C4. FINANCE COSTS
Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.
This note analyses the interest costs on the Group's borrowings which are described in note E5.
2015 2014
£m £m
Interest expense
On financial liabilities at amortised cost 122 141
On financial liabilities at fair value through profit or loss 14 15
136 156
Attributable to:
- policyholders 37 68
- owners 99 88
136 156
C5. TAX (CREDIT)/CHARGE
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial
position together with adjustments to tax payable in respect of previous years.The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
C5.1 Current year tax (credit)/charge
2015 2014
£m £m
Current tax:
UK corporation tax 11 120
Overseas tax 8 18
19 138
Adjustment in respect of prior years (99) (11)
Total current tax (credit)/charge (80) 127
Deferred tax:
Origination and reversal of temporary differences 7 28
Change in the rate of UK corporation tax (24) (2)
Movement in unrecognised deferred tax - (2)
Total deferred tax (credit)/charge (17) 24
Total tax (credit)/charge (97) 151
Attributable to:
- policyholders (33) 129
- owners (64) 22
Total tax (credit)/charge (97) 151
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 expense attributable to UK life assurance policyholder earnings is included in income tax
expense. The tax (credit)/charge attributable to policyholder earnings was £(33) million (2014: £129 million).
C5.2 Tax charged/(credited) to other comprehensive income
2015 2014
£m £m
Current tax credit on share schemes (1) (2)
Deferred tax charge/(credit) on defined benefit schemes 5 (9)
Deferred tax on share schemes 1 -
5 (11)
C5.3 Reconciliation of tax (credit)/charge
2015 2014
£m £m
Profit before tax 152 465
Policyholder tax credit/(charge) 33 (129)
Profit before the tax attributable to owners 185 336
Tax at standard UK1 rate of 20.25% (2014: 21.5%) 37 72
Non-taxable income and gains (13) (6)
Disallowable expenses 6 7
Prior year tax credit for shareholders2 (41) (16)
Movement on acquired in-force amortisation at less than 20.25% (2014: 21.5%) 15 2
Profits taxed at rates other than 20.25% (2014: 21.5%) (36) (21)
Recognition of previously unrecognised deferred tax assets (6) (19)
Deferred tax rate change (24) (7)
Temporary differences not valued (1) 4
Other (1) 6
Owners' tax (credit)/charge (64) 22
Policyholder tax (credit)/charge (33) 129
Total tax (credit)/charge for the period (97) 151
1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax (credit)/charge 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 The prior year tax credit represents the impact of reaching agreement with HMRC in respect of the Group's uncertain tax
positions for the years 2007 to 2014. This includes the increased utilisation of tax losses previously unrecognised, the
effect of the reduction in corporate tax rates across the years and a release of tax provisions.
D. EQUITY
D1. SHARE CAPITAL
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.
2015 2014
£ £
Authorised:
410 million (2014: 410 million) ordinary shares of E0.0001 each 31,750 31,750
Issued and fully paid:
225.4 million (2014: 225.1 million) ordinary shares of E0.0001 each 18,444 18,439
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such
dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.
Movements in issued share capital during the year:
2015
Number £
Shares in issue at 1 January 225,090,284 18,439
Other ordinary shares issued in the period 329,162 5
Shares in issue at 31 December 225,419,446 18,444
During the year, the Company issued 329,162 shares at a premium of £2 million in order to satisfy its obligations to
employees under the Group's sharesave schemes (see note I2).
2014
Number £
Shares in issue at 1 January 224,818,301 18,418
Other ordinary shares issued in the period 271,983 21
Shares in issue at 31 December 225,090,284 18,439
During 2014, the Company issued 271,983 shares at a premium of £1 million in order to satisfy its obligations to employees
under the Group's sharesave schemes.
D2. SHARES HELD BY THE EMPLOYEE BENEFIT TRUST AND GROUP ENTITIES
Where the Phoenix Group Holdings Employee Benefit Trust ('PGH EBT') or other Group entity acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners' equity. Gains and losses on sales of shares held by the PGH EBT and Group entities are charged or credited to the own shares account in equity.
The PGH EBT holds shares to satisfy awards granted to employees under the Group's share-based payment schemes.
2015 2014
£m £m
At 1 January 8 13
Shares acquired by the PGH EBT in year 6 8
Shares awarded to employees by the PGH EBT in year (9) (10)
Shares sold by other Group entities in year - (3)
At 31 December 5 8
During the year 1,398,290 (2014: 1,478,921) shares were awarded to employees by the PGH EBT and 735,068 (2014: 1,200,000)
shares were purchased. The number of shares held by the PGH EBT at 31 December 2015 was 587,334 (2014: 1,250,556).
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of
this loan are included in note 9 to the parent company accounts.
In the prior period 540,612 shares held by other Group entities were sold. The number of shares held by other Group
entities as at 31 December 2015 was nil (2014: nil).
D3. NON-CONTROLLING INTERESTS
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.
2015
Perpetual Reset Capital Securities £m UK Commercial Property Trust Total
Limited £m
£m
At 1 January 408 505 913
Profit for the year 2 46 48
Dividends paid - (23) (23)
Coupon paid, net of tax relief (15) - (15)
Exchange of Notes for subordinated notes (388) - (388)
Shares in subsidiaries subscribed for by non-controlling interests - 35 35
At 31 December 7 563 570
2014
Perpetual Reset Capital Securities UK Commercial Property Trust Limited Total
£m £m £m
At 1 January 408 370 778
Profit for the year 21 75 96
Dividends paid - (22) (22)
Coupon paid, net of tax relief (21) - (21)
Shares in subsidiaries subscribed for by non-controlling interests - 82 82
At 31 December 408 505 913
D3.1 Perpetual Reset Capital Securities
On 1 January 2010, Pearl Group Holdings (No. 1) Limited ('PGH1') had in issue £500 million of Perpetual Reset Capital
Securities ('the Notes') which are admitted to the Official List of the UK Listing Authority and to trading on the LSE.
Following amendments made to the Notes in 2010, the principal amount outstanding was £425 million.
On 23 January 2015, the Group exchanged 99% of the Notes for £428 million of new subordinated notes, issued by PGH Capital
Limited, and £3 million of cash (see note E5 for further details). £32 million of the new notes are held by Group companies
and are therefore eliminated in the preparation of the consolidated financial statements. The exchange resulted in a loss
of £12 million which has been recognised in equity. The remaining Notes outstanding at 31 December 2015 had a principal
amount outstanding of £6 million.
The Notes are unsecured obligations of PGH1 and are subordinate to the claims of senior creditors. Payments in respect of
the Notes are conditional upon PGH1 being solvent at the time of payment and immediately following such payment.
The outstanding Notes have no fixed maturity date and coupon payments may be deferred at the option of PGH1; accordingly
the Notes meet the definition of equity for financial reporting purposes and are disclosed as a non-controlling interest in
the consolidated financial statements.
The remaining Notes may be redeemed at par at the option of PGH1 on the first reset date of 25 April 2016 or on any coupon
payment date thereafter. Redemption is subject to the agreement of the PRA. In certain circumstances PGH1 has the right to
substitute the Notes or to redeem the Notes before the first reset date.
Coupons are payable annually in arrears on 25 April, at the rate of 6.5864% per annum, until the first reset date.
Thereafter coupons are payable semi-annually at 2.73% per annum over the then prevailing offered rate for six month
sterling deposits.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the
deferred coupon payment through the alternative coupon satisfaction mechanism (the 'ACSM'), which involves the issue by
PGH1 of ordinary shares in order to fund payment of the deferred coupon.
For so long as a deferred coupon payment has not been satisfied, PGH1 may not declare, pay or distribute a dividend on any
of its securities in issue ranking junior to the Notes, including the ordinary shares of PGH1 or any parity securities or,
except in particular circumstances, redeem, purchase or otherwise acquire any of its securities in issue ranking junior to
the Notes, including its ordinary shares or any parity securities. These restrictions would also apply to the Company until
the deferred coupon payment is satisfied.
On 23 January 2015, the coupon that was due on the Notes was settled with the noteholders that exchanged their Notes. On 25
April 2015, the 2015 coupon was settled in full with the remaining noteholders.
On 21 March 2016, PGH1 gave notice to the noteholders to redeem the remaining Notes on 25 April 2016.
D3.2 UK Commercial Property Trust Limited
UK Commercial Property Trust Limited ('UKCPT') is a property investment subsidiary which is domiciled in Guernsey and is
admitted to the Official List of the UK Listing Authority and to trading on the LSE.
As at 31 December 2015 the Group held 50% (2014: 53%) of the issued share capital of UKCPT. The Group's interest in UKCPT
is held in the with-profit funds of the Group's life companies. Therefore, the shareholder exposure to the results of UKCPT
is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.
Summary financial information for the UKCPT is shown below:
2015 2014
£m £m
Non-current assets 683 612
Current assets 17 14
Non-current liabilities (124) (111)
Current liabilities (13) (10)
563 505
Revenue 58 86
Profit before tax 46 75
Income tax - -
Profit for the year after tax 46 75
E. FINANCIAL ASSETS & LIABILITIES
E1. FAIR VALUES
Financial assets
Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to
purchase or sell the asset.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. For the majority of the Group's loans and receivables these investments are initially recognised at cost,
being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly
attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these
investments are carried at amortised cost, using the effective interest method. The Group holds a portfolio of loans that
are designated at fair value through profit or loss.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and
subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the
consolidated income statement.
Equities, fixed and variable rate income securities, collective investment schemes and certain loans and receivables are
designated at fair value through profit or loss and accordingly are stated in the statement of consolidated financial
position at fair value. They are designated at fair value through profit or loss because this is reflective of the manner
in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to
the insurance liabilities that the assets are backing.
Impairment of financial assets
The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost is
impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective
evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial
assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment.
Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised,
are not included in the collective assessment of impairment.
Fair value estimation
The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives are
based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid
price on the period end date. The fair value of investments that are not traded in an active market is determined using
valuation techniques such as broker quotes, 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 flow techniques are used, estimated
future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates
and interest rate assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published
bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their
carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.
Joint ventures
Investments in joint ventures that are held for investment purposes are accounted for under IAS 39 Financial Instruments:
Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair
value through profit or loss. There are no investments in joint ventures which are of a strategic nature.
Financial liabilities
On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration
received less directly attributable transaction costs (with the exception of liabilities at fair value through profit or
loss for which all transaction costs are expensed).
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts and other
liabilities designated at fair value through profit or loss) are measured at amortised cost using the effective interest
method.
Financial liabilities are designated upon initial recognition at fair value through profit or loss and where doing so
results in more meaningful information because either:
· it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or
liabilities or recognising the gains and losses on them on different bases; or
· a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a
fair value basis, in accordance with a documented risk management or investment strategy, and information about the
investments is provided internally on that basis to the Group's key management personnel.
Investment contracts without DPF
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified
as investment contracts and accounted for as financial liabilities.
Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the
amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the
liability to the policyholder.
The valuation of liabilities on unit-linked contracts is held at the fair value of the related assets and liabilities. The
liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of
future policy costs over future charges.
Movements in the fair value of investment contracts without DPF are included in the 'change in investment contract
liabilities' in the consolidated income statement.
Investment contract policyholders are charged for policy administration services, investment management services,
surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are
performed. If the fees are for services provided in future periods, then they are deferred and recognised over those
periods. 'Front end' fees are charged on some non-participating investment contracts. Where the non-participating
investment contract is measured at fair value, such fees which relate to the provision of investment management services
are deferred and recognised as the services are provided.
Deposits from reinsurers
It is the Group's practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or
marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a
'financial asset' and the collateral repayable is recognised as 'deposits received from reinsurers' in the statement of
consolidated financial position.
Net asset value attributable to unitholders
The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes
which are consolidated by the Group. This interest is classified at fair value through profit or loss and measured at fair
value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
Obligations for repayment of collateral received
It is the Group's practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash
or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a
'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the
statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at
amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December
2015:
2015
Carrying value
Total Amounts due for settlement after Fair value £m
£m 12 months £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives 1,498 1,335 1,498
Designated upon initial recognition:
Loans and receivables 268 245 268
Equities1 12,351 - 12,351
Investment in joint venture 149 - 149
Fixed and variable rate income securities 31,814 24,176 31,814
Collective investment schemes 1 3,826 - 3,826
Loans and receivables at amortised cost 309 24 309
50,215 50,215
Less amounts classified as held for sale (see note I1.2) (149) - (149)
Total financial assets 50,066 50,066
Carrying value
Total Amounts due for settlement after Fair value £m
£m 12 months £m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,360 1,255 1,360
Designated upon initial recognition:
Borrowings 194 194 194
Net asset value attributable to unitholders 1 5,120 - 5,120
Investment contract liabilities 1 7,905 - 7,905
Financial liabilities measured at amortised cost:
Borrowings 1,804 1,772 1,907
Deposits received from reinsurers 378 347 378
Obligations for repayment of collateral received 2 725 - -
Total financial liabilities 17,486 16,864
1 These assets and liabilities have no expected settlement date.
2 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.
2014
Carrying value
Total Amounts due for settlement after Fair value £m
£m 12 months £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives 2,558 2,112 2,558
Designated upon initial recognition:
Equities 1 13,168 - 13,168
Investment in joint venture 1 133 - 133
Fixed and variable rate income securities 34,384 27,244 34,384
Collective investment schemes 1 3,583 - 3,583
Loans and receivables at amortised cost 196 36 196
Total financial assets 54,022 54,022
Carrying value
Total Amounts due for settlement after Fair value £m
£m 12 months £m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 2,192 2,122 2,192
Designated upon initial recognition:
Borrowings 184 184 184
Net asset value attributable to unitholders 1 4,659 - 4,659
Investment contract liabilities 1 8,451 - 8,451
Financial liabilities measured at amortised cost:
Borrowings 1,578 1,425 1,698
Deposits received from
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