REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2015 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 19
23/03/2016 08:18
- Part 19: For the preceding part double click ID:nRSW9668Sr
giving this opinion, accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in
writing.
OTHER MATTER
We have reported separately on the IFRS consolidated financial statements of Phoenix Group Holdings for the year ended 31
December 2015.
The information contained in the Phoenix Group MCEV supplementary information should be read in conjunction with the
consolidated financial statements prepared on an IFRS basis.
Ernst & Young LLP
London
22 March 2016
MCEV SUPPLEMENTARY INFORMATION
SUMMARISED CONSOLIDATED INCOME STATEMENT - GROUP MCEV BASIS
For the year ended 31 December 2015
2015 2014
£m £m
Life MCEV operating earnings 274 341
Management services operating profit 30 36
Ignis operating profit - discontinued operations - 17
Group costs (26) (28)
Group MCEV operating earnings before tax 278 366
Economic variances on life business (221) 54
Economic variances on non-life business (8) (64)
Other non-operating variances on life business 98 (94)
Non-recurring items on non-life business (39) 317
Finance costs attributable to owners (91) (90)
Group MCEV earnings before tax 17 489
Tax on operating earnings (55) (78)
Tax on non-operating earnings 64 -
Total tax 9 (78)
Group MCEV earnings after tax 26 411
Analysed between:
Group MCEV earnings after tax from continuing operations 26 429
Group MCEV earnings after tax from discontinued operations - (18)
Group MCEV earnings after tax 26 411
MCEV SUPPLEMENTARY INFORMATION
MCEV EARNINGS PER ORDINARY SHARE
For the year ended 31 December 2015
2015 2014
Group MCEV operating earnings after tax
Basic1 99.5p 128.4p
Diluted2 99.3p 128.2p
Group MCEV earnings after tax
Basic1 12.1p 183.2p
Diluted2 12.1p 182.8p
1 Based on 224 million shares (2014: 225 million) as set out in note B3.1 of the IFRS consolidated financial statements.
2 Based on 225 million shares (2014: 225 million), allowing for share options in issue as set out in note B3.2 of the IFRS
consolidated financial statements.
The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder
tax for presentation in the consolidated income statement. The tax rate used is the UK corporate tax rate of 20.25% (2014:
21.5%).
MCEV SUPPLEMENTARY INFORMATION
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME - GROUP MCEV BASIS
For the year ended 31 December 2015
2015 2014
£m £m
Group MCEV earnings after tax 26 411
Other comprehensive income:
Remeasurements and pension scheme contributions on defined benefit pension schemes (net of tax) (44) (27)
Fair value gains on owner-occupied property 4 -
Total comprehensive income for the year (14) 384
MCEV SUPPLEMENTARY INFORMATION
RECONCILIATION OF MOVEMENT IN EQUITY - GROUP MCEV BASIS
For the year ended 31 December 2015
2015 2014
£m £m
Opening Group MCEV equity 2,647 2,378
Total comprehensive income for the year (14) 384
Issue of ordinary share capital, net of associated commissions and expenses 2 1
Dividends paid on ordinary shares (120) (120)
Dividends paid on shares held by the employee trust and Group entities - 1
Shares sold by Group entities - 4
Movement in equity for equity-settled share-based payments 4 7
Shares acquired by the employee benefit trust (6) (8)
Total capital and dividend flows - external (120) (115)
Closing Group MCEV equity 2,513 2,647
MCEV SUPPLEMENTARY INFORMATION
GROUP MCEV ANALYSIS OF EARNINGS
For the year ended 31 December 2015
Non-covered business
Covered business MCEV Management services Other Groupcompanies1 IFRS Group
£m IFRS £m MCEV
£m £m
Group MCEV at 1 January 2015 2,856 142 (351) 2,647
Operating MCEV earnings (after tax) 220 24 (21) 223
Non-operating MCEV earnings (after tax) (98) 3 (102) (197)
Total MCEV earnings 122 27 (123) 26
Other comprehensive income/(expense) - 4 (44) (40)
Transfers from covered to non-covered business2 (138) - 138 -
Capital and dividend flows - internal (166) (8) 174 -
Capital and dividend flows - external - - (120) (120)
Closing value at 31 December 2015 2,674 165 (326) 2,513
1 Comprises the Group holding and other companies that do not form part of the Phoenix Life division.
2 Following the de-authorisation of Opal Reassurance Limited in December 2015, its remaining net assets have been
transferred from covered business to non-covered business.
For the year ended 31 December 2014
Non-covered business
Covered business MCEV Management services AssetManagement3IFRS Other Group companies1 IFRS Group
£m IFRS £m £m MCEV
£m £m
Group MCEV at 1 January 2014 3,059 134 108 (923) 2,378
Operating MCEV earnings (after tax) 268 28 14 (22) 288
Non-operating MCEV earnings (after tax) (32) (8) (2) 165 123
Total MCEV earnings 236 20 12 143 411
Other comprehensive income - - - (27) (27)
Divested businesses4 (18) - (91) 109 -
Capital and dividend flows - internal (421) (12) (29) 462 -
Capital and dividend flows - external - - - (115) (115)
Closing value at 31 December 2014 2,856 142 - (351) 2,647
3 Relates to the Ignis division disposed of on 1 July 2014, classified as discontinued operations. The Asset Management
MCEV earnings after tax of £12 million includes intra-group income of £30 million.
4 Comprises capital flows relating to the disposal of Ignis and BA(GI) Limited.
MCEV SUPPLEMENTARY INFORMATION
RECONCILIATION OF GROUP IFRS EQUITY TO MCEV NET WORTH
For the year ended 31 December 2015
2015 2014
£m £m
Group net assets attributable to owners of the parent as reported under IFRS 2,434 2,365
Goodwill and other intangibles in accordance with IFRS removed (net of tax) (204) (217)
Value of in-force business in accordance with IFRS removed (net of tax) (906) (1,011)
Adjustments to IFRS reserving (117) (130)
Tax adjustments 11 33
Revalue listed debt to market value (87) (68)
Eliminate after tax pension scheme surpluses (including IFRIC 14 adjustments)1 (560) (492)
Other adjustments2 - (14)
MCEV net worth attributable to owners of the parent 571 466
MCEV value of in-force business included (net of tax) as set out in note 2 1,942 2,181
Closing Group MCEV 2,513 2,647
1 Pension scheme surpluses valued on an IFRS basis are removed. This includes the IFRIC 14 adjustments as described in note
G6 of the IFRS consolidated financial statements.
2 Includes adjustments to revalue unlisted debt carried at amortised cost under IFRS at face value.
MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
OVERVIEW
The supplementary information on pages 209 to 220 has been prepared on a MCEV basis except for the items described further
below.
The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum
in June 2008 and amended in October 2009, except that:
· risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10bps rather
than as the swap rate curve;
· no allowance for the cost of residual non-hedgeable risk ('CNHR') has been made because, in the opinion of the
Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is
focused entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR
is disclosed separately in note 1(b); and
· the asset management (prior to its divestment on 1 July 2014) and management service companies' values are calculated
and presented on a basis consistent with IFRS. Under CFO Forum principles and guidance, productivity gains should not be
recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost
reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV
principles and guidance were to be applied to the asset management and the management service companies, it would not
provide a fair reflection of the Group's financial position. These companies are therefore reported alongside the Group's
other holding companies at their IFRS net asset value.
In January 2015, the Group announced the successful exchange of 99% of the Group's Perpetual Reset Capital Securities
('Tier 1 notes') for £428 million of new listed subordinated notes issued by PGH Capital Limited and maturing in 2025. The
terms of the new notes meet the requirement of Tier 2 capital under Solvency II and have a coupon of 6.625%. Upon exchange,
new notes with a face value of £32 million were held by Group companies and continue to be held as at 31 December 2015.
The Finance (No.2) Act 2015 was enacted in November 2015 and set out reductions in rates of corporation tax from 20% to 19%
in April 2017 and from 19% to 18% in April 2020. The impact of these changes has been reflected in the Group's MCEV at 31
December 2015.
A further 1% reduction, to 17%, effective from April 2020 has been announced in the 2016 Budget and will be introduced by
future legislation. The impact of this change has not been reflected in the Group's MCEV at 31 December 2015.
On 9 November 2015 the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure
substantively all of the PLAL annuity liabilities previously ceded to Opal Re, a subsidiary undertaking of the Company. The
Group paid a reinsurance premium of £1,346 million to RGA International. A favourable impact of £13 million has arisen as a
result of entering the reassurance arrangement, consisting of an £18 million gain recognised in 'Other non-operating
variances on life business' and attributable transaction expenses of £5 million recognised in 'Non-recurring items on
non-life business'.
On 2 December 2015, the Group completed the sale of its entire interest in Scottish Mutual International Limited ('SMI')
for cash consideration of £14 million following a pre-completion return of capital by SMI. The results of SMI have been
included in the MCEV supplementary information up to the date of the disposal, and a loss on disposal of £4 million has
been recorded in 'Other non-operating variances on life business'.
COVERED BUSINESS
The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis (prior to its
divestment on 1 July 2014) and the management service companies.
Opal Re was included within covered business prior to its de-authorisation as an insurance company in December 2015, and
was valued on a basis consistent with the annuity business within the UK life companies. Following the de-authorisation,
the residual net assets of Opal Re are included within non-covered business and valued in accordance with IFRS.
MCEV METHODOLOGY
The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and
liabilities are valued in line with market prices and consistently with each other.
The key components of MCEV are net worth plus the value of in-force covered business.
a) Net worth
For the Group's life companies, net worth is defined as the market value of shareholder funds plus the shareholders'
interest in surplus assets held in long-term business funds less the market value of any outstanding debt of the life
companies.
Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in
the life company or as a liability in the holding company. This presentation has no impact on the overall MCEV but does
affect the allocation of net assets between covered and non-covered business.
b) Value of in-force business ('VIF')
The market consistent VIF represents the present value of profits attributable to shareholders arising from the in-force
business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts
and frictional costs of required capital.
The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more
detail below):
· deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements.
These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not
necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and
discounting all cash flows at risk-free rates. This is known as the 'certainty equivalent approach'; and
· stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders.
Here, the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet
reporting.
The VIF consists of the following components:
Present value of future profits ('PVFP')
The PVFP represents the present value of profits attributable to shareholders arising from the in-force business. The PVFP
is calculated by projecting and discounting using risk-free rates, with an allowance for liquidity premiums where
appropriate.
The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make
appropriate allowance for expected future experience where there is sufficient evidence to justify; for example, in
allowing for future mortality improvements on annuity business.
Time value of financial options and guarantees ('TVFOGs')
The Group's embedded value includes an explicit allowance for the TVFOGs embedded within insurance contracts, including
investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options
and guarantees to shareholders is calculated using market-consistent stochastic models calibrated to the market prices of
financial instruments as at the period end.
The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles and Practices of
Financial Management. The modelling of management actions vary for each of the funds but typically include management of
bonus rates and policy enhancements, charges to asset shares to cover increases to the cost of guarantees and alterations
to investment strategy.
Frictional cost of capital ('COC')
COC is defined as the difference between the market value of shareholder-owned assets backing required capital and the
present value of future releases of those assets allowing for future investment returns on that capital, investment
expenses and taxes.
Required capital is defined as the minimum regulatory capital requirement, which is the greater of Solvency I Pillar 1 and
Pillar 2 capital requirements, plus the capital required under the Group's capital management policy. This equates to 146%
of the Solvency I Pillar 1 minimum regulatory capital requirement or 123% of the Solvency I Pillar 2 minimum regulatory
capital requirement (2014: 142% Pillar 1, 124% Pillar 2).
Solvency II introduces a new capital regime for insurers with effect from 1 January 2016. No allowance has been made within
the Group's MCEV information for the impact of this, in accordance with the additional guidance issued by the CFO Forum in
October 2015.
Costs of residual non-hedgeable risks ('CNHR')
The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not
already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.
No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO
Forum principles and guidance does not anticipate further risk management actions, and therefore does not provide a fair
reflection of the Group's ongoing risk.
However, the CNHR calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating
further risk management actions, has been disclosed below.
For with-profits business the CNHR would increase the TVFOGs by £23 million (2014: £14 million).
For other business the cost would be £106 million (2014: £105 million). This equates to an equivalent average cost of
capital charge of 0.76% (2014: 0.95%). The level of capital assumed in this calculation is determined based on a 99.5%
confidence level over a 1 year time horizon, consistent with the ICA methodology. Allowance is made for diversification
benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.
c) Valuation of debt
Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV
principles.
The National Provident Life Limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its
unit-linked and unitised with-profits business. This securitisation has been valued on a cash flow basis, allowing for
payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised
unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value
accrues to the embedded value.
Unlisted bank debt owed by the holding companies is included at face value.
d) Taxation
Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of
non-profit funds. This allowance reflects the projected pace of releases of surplus from non-profit funds that is not
required to support with-profit funds.
Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies.
The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against
the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of
debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by
the projected embedded value of the Group's businesses.
e) New business
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed
annuity terms. The value is calculated based on management's assumptions as to long-term profit margins and projected
take-up rates. As at 31 December 2015, the Group MCEV included £165 million in respect of these policies (2014: £180
million). These policies are excluded from the definition of new business on the basis that the annuity being provided is
an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.
Policies with guarantees are fully reserved for on an economic basis.
New business includes all other annuities written by the life insurance companies.
f) Participating business
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company
practice.
The time value of options and guarantees used in the calculation of MCEV also allows for expected management and
policyholder responses to the varying external economic conditions simulated by the economic scenario generators.
Policyholder response has been modelled based on historical experience. Management actions have been set in accordance with
each life company's Principles and Practices of Financial Management.
g) Pension schemes
The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme
surpluses.
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding
requirement and, to the extent that the contributions payable would result in a surplus that would not be recoverable, a
liability is recognised when the obligation arises. The IFRS IFRIC 14 adjustments are not reflected in the Group MCEV as
the Group anticipates that its ultimate contributions into the pension schemes will not give rise to an unrecoverable
surplus.
h) Events after the reporting period
On 22 March 2016, the Board recommended a final dividend of 26.7p per share (2014: 26.7p per share) for the year ended 31
December 2015. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend will
be charged to the Reconciliation of Movement in Equity - Group MCEV basis in 2016.
2. COMPONENTS OF THE MCEV OF COVERED BUSINESS
2015 2014
£m £m
Net worth 732 675
PVFP 2,025 2,238
TVFOG (58) (38)
COC (25) (19)
Total VIF 1,942 2,181
2,674 2,856
The net worth of covered business of £732 million at 31 December 2015 (2014: £675 million) consists of £190 million of free
surplus in excess of required capital (2014: £196 million).
3. ANALYSIS OF COVERED BUSINESS MCEV EARNINGS (AFTER TAX)
2015
Net worth VIF Total life
£m £m MCEV
£m
Life MCEV at 1 January 2015 675 2,181 2,856
New business value (2) 4 2
Expected existing business contribution (reference rate)1 19 52 71
Expected existing business contribution (in excess of reference rate)2 (1) 39 38
Transfer from VIF to net worth 188 (188) -
Experience variances (20) (1) (21)
Assumption changes (5) 25 20
Other operating variances 90 20 110
Life MCEV operating earnings 269 (49) 220
Economic variances (63) (113) (176)
Other non-operating variances 136 (58) 78
Total Life MCEV earnings 342 (220) 122
Transfer from covered business to non-covered business (138) - (138)
Capital and dividend flows (147) (19) (166)
Life MCEV at 31 December 2015 732 1,942 2,674
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the
long-term risk-free rate at 2.29% (2014: 3.55%).
2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the
risk-free rate arising from long-term risk premiums on equities, property and corporate bonds.
2014
Net worth VIF Total life
£m £m MCEV
£m
Life MCEV at 1 January 2014 802 2,257 3,059
New business value 7 4 11
Expected existing business contribution (reference rate) 31 79 110
Expected existing business contribution (in excess of reference rate) (8) 35 27
Transfer from VIF to net worth 179 (179) -
Experience variances 45 8 53
Assumption changes 20 (35) (15)
Other operating variances 71 11 82
Life MCEV operating earnings 345 (77) 268
Economic variances (28) 70 42
Other non-operating variances (34) (40) (74)
Total Life MCEV earnings 283 (47) 236
Divested business (18) - (18)
Capital and dividend flows (392) (29) (421)
Life MCEV at 31 December 2014 675 2,181 2,856
4. NEW BUSINESS
The value generated by new business written during the period is calculated as the present value of the projected stream of
after-tax distributable profits from that business. This contribution has been valued using economic and non-economic
assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding
required capital on the same basis as for the in-force covered business.
Premium £m MCEV MCEV/
£m Premium
%
Year ended 31 December 2015 141 2 1%
Year ended 31 December 2014 154 11 7%
5. MATURITY PROFILE OF BUSINESS
This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projected on a
certainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted at risk-free rates.
Present value of future profits (PVFP) Years
1-5 6-10 11-15 16-20 20+ Total
£m £m £m £m £m £m
31 December 2015 845 533 322 194 131 2,025
31 December 2014 859 556 387 250 186 2,238
6. ASSUMPTIONS
REFERENCE RATES
(a) Risk-free rates
Risk-free rates are based on the annually compounded UK Government bond nominal spot curve plus 10bps, extrapolated as
necessary to meet the term of the liabilities.
The risk-free rates assumed for a sample of terms were as follows:
Term 2015 2014
Gilt yield +10bps Swap yield Gilt yield Swap yield
+10bps
1 year 0.36% 0.85% 0.43% 0.98%
5 years 1.45% 1.60% 1.31% 1.46%
10 years 2.15% 2.04% 1.97% 1.87%
15 years 2.59% 2.22% 2.38% 2.12%
20 years 2.85% 2.25% 2.62% 2.26%
Had the Group used the swap rate curve as set out in the CFO Forum principles, the MCEV would have been £309 million lower
(2014: £218 million lower).
(b) Liquidity premiums
In October 2009, the CFO Forum published an amendment to the MCEV principles to reflect the inclusion of a liquidity
premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk-free yield
curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits
defined as an annuity or in-the-money guaranteed annuity options. The liquidity premium is determined by reference to the
yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and
unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is
as follows:
2015 2014
Additional yield over risk-free rates 0.52% 0.46%
INFLATION
For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index ('RPI') as at 31 December 2015, was
taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National
Average Earnings inflation is assumed to be RPI plus 100bps as at 31 December 2015 (2014: RPI plus 100bps).
STOCHASTIC ECONOMIC ASSUMPTIONS
The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to
market conditions as at 31 December 2015. The scenario generator and calibration are consistent with that used for
realistic balance sheet reporting.
A LIBOR Market Model with displaced diffusion and stochastic volatility is used to generate risk-free rates over a complete
yield curve, calibrated to the UK nominal spot curve plus 10bps, consistent with the deterministic projections. Interest
rate volatility is calibrated to swaption implied volatilities, as per the sample below.
Interest rate volatility Option term (years)
5 10 15 20 25 30
2015 Swap term (years)
5 35.3% 32.6% 31.2% 30.6% 30.4% 30.2%
10 30.9% 29.8% 29.3% 29.3% 29.2% 28.7%
20 28.1% 28.6% 29.0% 28.8% 28.0% 27.1%
30 28.3% 29.0% 28.9% 28.0% 26.6% 25.7%
Interest rate volatility Option term (years)
5 10 15 20 25 30
2014 Swap term (years)
5 37.4% 32.1% 29.1% 27.4% 26.5% 25.7%
10 29.9% 27.0% 25.4% 24.6% 24.1% 23.2%
20 24.6% 23.8% 23.4% 22.9% 22.0% 21.0%
30 23.6% 23.3% 22.7% 21.9% 20.8% 19.8%
Real interest rates have been modelled using the two-factor Hull-White model, calibrated to index-linked gilts.
Equity volatility is calibrated to replicate the prices on a range of FTSE equity options with a range of terms and
strikes. The equity volatility model used allows volatility to vary with both term and strike of the options.
Equity implied volatility (ATM) Term (years)
5 10 15 20 25 30
2015 21.0% 22.1% 22.7% 23.1% 23.3% 23.5%
2014 20.8% 22.2% 23.0% 23.4% 23.7% 23.9%
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 31 December
2015 is 15% (2014: 15%).
The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, derived from
current markets.
OPERATING EARNINGS
The Group uses normalised investment returns in calculating the expected existing business contribution. The Group
considers that an average return over the remaining term of its in-force business is more appropriate than using a
short-term rate and is more consistent with the Group's expectation of longer-term rates of return. Therefore, the Group
calculates the expected contribution on existing business using a 15-year gilt rate at the beginning of the reporting
period plus 10bps and long-term expectations of excess investment returns.
The table below sets outs the asset risk premiums used:
2015 2014
Equities 3.0% 3.0%
Property 2.0% 2.0%
Gilts 0.0% 0.0%
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit
risk.
EXPENSES
Each life company's projected per policy expenses are based on agreements with the Group's management service companies,
adjusted to allow for additional costs incurred directly by the life companies, including, for example, regulatory fees and
one-time expenses.
The life companies' projected investment expenses are based on the fees agreed with the Group's fund managers, allowing for
current and projected future asset mixes.
VALUATION OF DEBT AND NON-CONTROLLING INTERESTS
The Group's statement of consolidated financial position as at 31 December 2015 includes Perpetual Reset Capital Securities
with principal outstanding of £6 million (2014: £394 million), Phoenix Life Limited subordinated debt with a face value of
£200 million (2014: £200 million), the PGH Capital Limited senior bond with a face value of £300 million (2014: £300
million) and the PGH Capital Limited subordinated notes issued during the year, with principal outstanding of £396 million
(net of internal holdings). These listed securities have been included within the MCEV at their market value quoted at the
reporting date.
The table below summarises the face and market values of these debt obligations after adjustment for internal holdings in
the Perpetual Reset Capital Securities and the PGH Capital subordinated notes:
2015 2014
Face value £m Market value Face value £m Market value
£m £m
Listed debt and non-controlling interests
Perpetual Reset Capital Securities 6 6 394 387
Phoenix Life Limited subordinated debt 200 212 200 212
PGH Capital Limited senior bond 300 324 300 324
PGH Capital Limited subordinated notes 396 400 - -
Unlisted debt has been included at face value:
2015 2014
Face value £m Face value £m
Unlisted debt
PGH Capital Limited facility 650 840
7. SENSITIVITY TO ASSUMPTIONS
The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2015
2015 2014
Life MCEV £m Life MCEV £m
(1) Base 2,674 2,856
(2) 1% decrease in risk-free rates 194 59
(3) 1% increase in risk-free rates (157) (68)
(4) 10% decrease in equity market values (25) (46)
(5) 10% increase in equity market values 27 46
(6) 10% decrease in property market values (19) (46)
(7) 10% increase in property market values 18 45
(8) 100 bps increase in credit spreads1 (158) (164)
(9) 100 bps decrease in credit spreads1 162 157
(10) 25% increase in equity/property implied volatilities (22) (9)
(11) 25% increase in swaption implied volatilities (7) (9)
(12) 25% decrease in lapse rates and paid-up rates (40) (30)
(13) 5% decrease in annuitant mortality (109) (140)
(14) 5% decrease in non-annuitant mortality 15 15
(15) Required capital equal to the minimum regulatory capital2 20 16
1 25bps is assumed to relate to default risk.
2 Minimum regulatory capital is defined as the greater of Solvency I Pillar 1 and Pillar 2 capital requirements without any
allowance for the Group's capital management policy.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the
terms of agreements with the management services companies.
ADDITIONAL INFORMATION
In this section
Shareholder information 222
Glossary 225
Annual general meeting
Our Annual General Meeting ('AGM') will be held on 11 May 2016 at 12:30pm.
The voting results for our 2016 AGM, including proxy votes and votes withheld, will be available on the Group's website
shortly after the meeting.
Share price performance
Shareholder profile as at 31 December 2015
Range of shareholdings No. of % No. of %
shareholders shares
1-1,000 625 38.5 301,280 0.1
1,001-5,000 482 29.6 1,088,957 0.5
5,001-10,000 105 6.5 753,488 0.4
10,001-250,000 299 18.4 20,086,625 8.9
250,001-500,000 44 2.7 16,084,163 7.1
500,001 and above 70 4.3 187,104,933 83
Total 1625 100 225,419,446 100
Shareholder services
Managing your shareholding
Our registrar, Computershare, maintains the Company's register of members. Shareholders may request a hard copy of this
Annual Report from our registrar and if you have any further queries in respect of your shareholding, please contact
directly using the contact details set out below.
Registrar details
Computershare Investor Services (Cayman) Limited
Queensway House
Hilgrove Street
St Helier
Jersey, JE1 1ES
Shareholder helpline number +44 (0) 870 707 4040
Fax number +44 (0) 870 873 5851
Shareholder helpline email address info@computershare.co.je
Dividend mandates
Shareholders may find it convenient to have their dividends paid directly to their bank or building society account. If you
wish to take advantage of this facility please call Computershare and request a 'Dividend Mandate' form.
SCRIP dividend alternative
The Company does not currently offer a scrip dividend alternative.
Warning to shareholders
Over recent years, many companies have become aware that their shareholders have received unsolicited phone calls or
correspondence concerning investment matters. These are typically from overseas-based 'brokers' who target UK shareholders,
offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are
commonly known as 'boiler rooms'.
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free
reports about the Company.
If you receive any unsolicited investment advice:
· make sure you get the correct name of the person and organisation;
· check that they are properly authorised by the Financial Conduct Authority ('FCA') before getting involved by visiting
www.fca.org.uk/firms/systems-reporting/register;
· report the matter to the FCA by calling the FCA Consumer Helpline on 0800 111 6768; and
· if the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services
Compensation Scheme ('FSCS'). The FCA can also be contacted by completing an online form available at
www.fca.org.uk/consumers/scams/investment-scams/share-fraud-and-boiler-room-scams/reporting-form.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
More detailed information on this or similar activity can be found on the FCA website available at
www.fca.org.uk/consumers.
Share price
You can access the current share price of Phoenix Group Holdings on the Group's website together with electronic copies of
the Group's financial reports and presentations at www.thephoenixgroup.com/investor-relations.aspx.
Ordinary shares - 2015 final dividend
Ex-dividend date 7 April 2016
Record date 8 April 2016
Payment date for the recommended final dividend 13 May 2016
Group financial calendar for 2016
Annual General Meeting 11 May 2016
Announcement of unaudited six months' Interim Results 25 August 2016
Forward-looking statements
The 2015 Annual Report and Accounts contains, and the Group may make other statements (verbal or otherwise) containing,
forward-looking statements and other financial and/or statistical data about the Group's current plans, goals and
expectations relating to future financial conditions, performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'will', 'may', 'should', 'expects', 'plans', 'aims', 'seeks',
'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking. Such forward-looking
statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events
and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the
Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses
could differ materially from those that we have estimated. Other factors which could cause actual results to differ
materially from those estimated by forward-looking statements include but are not limited to:
· domestic and global economic and business conditions;
· asset prices;
· market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained
low-interest rate environment, and the performance of financial markets generally;
· the policies and actions of governmental and/or regulatory authorities, including, for example, new government
initiatives related to the financial crisis and the effect of the European Union's 'Solvency II' requirements on the
Group's capital maintenance requirements;
· market developments and government actions regarding the referendum on UK membership of the European Union;
· the impact of inflation and deflation;
· market competition;
· changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and
morbidity trends, gender pricing and lapse rates);
· the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries;
· risks associated with arrangements with third parties;
· inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and
· the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the
jurisdictions in which members of the Group operate.
As a result, the Group's actual future financial condition, performance and results may differ materially from the plans,
goals and expectations set out in the forward-looking statements within the 2015 Annual Report and Accounts.
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2015 Annual Report
and Accounts or any other forward-looking statements it may make or publish.
The 2015 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its
Directors or agents do not accept or assume responsibility to any other person in connection with this document and any
such responsibility or liability is expressly disclaimed.
Nothing in the 2015 Annual Report and Accounts is or should be construed as a profit forecast or estimate.
GLOSSARY
ABS Asset Backed Securities - A collateralised security whose value and income payments are derived from a specified pool of underlying assets
ACSM Alternative Coupon Satisfaction Mechanism - The mechanism under the Tier 1 Notes, under which, if Pearl Group Holdings (No. 1) Limited opts to defer a coupon payment, the deferred coupon payment may only be satisfied through the proceeds of the issue of certain forms of securities, which may be made at any time
ALM Asset Liability Management - Management of mismatches between assets and liabilities within risk appetite
ANNUITY POLICY A policy that pays out regular benefit amounts, either immediately and for the remainder of a policyholder's lifetime (immediate annuity), or deferred to commence at some future date (deferred annuity)
ASSET MANAGEMENT The management of assets using a structured approach to guide the act of acquiring and disposing of assets, with the objective of meeting defined investment goals and maximising value for investors, including policyholders
BLACK-SCHOLES A mathematical model used to calculate the value of an option
CFO FORUM A high-level discussion group formed of the Chief Financial Officers of major European insurance companies. Its aim is to influence the development of financial reporting and related regulatory developments for insurance companies on behalf of its members
CLOSED LIFE FUND A fund that no longer accepts new business. The fund continues to be managed for the existing policyholders
COC Frictional Cost of Capital - The difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes
CNHR Cost of residual non-hedgeable risk - The expected cost of non-hedgeable risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the present value of future profits or time value of financial options and guarantees within the MCEV
DPF Discretionary Participation Feature - A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is contractually at the discretion of the issuer
EBT Employee Benefit Trust - A trust set up to enable its Trustee to purchase and hold shares to satisfy employee share-based incentive plan awards. The Company's EBT is the Phoenix Group Holdings Employee Benefit Trust
ECONOMIC ASSUMPTIONS Assumptions related to future interest rates, inflation, market value movements and tax
EEA European Economic Area - Established on 1 January 1994 and is an agreement between Norway, Iceland, Liechtenstein and the European Union. It allows these countries to participate in the EU's single market without joining the EU
EMBEDDED VALUE The value to equity shareholders of the net assets and expected future profits of a life company
EXPERIENCE VARIANCES Current period differences between the actual experience incurred and the assumptions used in the calculation of MCEV or IFRS insurance liabilities
FINANCIAL LEVERAGE Gross shareholder debt (financial leverage basis) as a percentage of the gross MCEV
FINANCIAL REPORTING COUNCIL The UK's independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment
FREE SURPLUS The amount of capital held in life companies in excess of that needed to support their minimum regulatory capital requirement, plus the capital required under the Group's capital management policy
FCA Financial Conduct Authority - The body responsible for supervising the conduct of all financial services firms and for the prudential regulation of those financial services firms not supervised by the Prudential Regulation Authority ('PRA'), such as asset
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